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Currency Market Analysis

Jun 25, 2019 | Currency Market Analysis

Global Themes

Sterling ticks higher, key levels eyed
- GBP/EUR inches towards 22-week lows
- Dollar downtrend accelerates
- Safe-havens swell as US-Iran hostility

GBP

GBP/EUR inches towards 22-week lows
The pound has suffered an aggressive 7-week slide against the Euro, its longest weekly losing streak since the end of 2015. Approaching 22-week lows yesterday, the currency pair could be on track for yet another weekly slump, though this morning GBP/EUR flirts with the €1.12 threshold.

After falling to a post-referendum low of €1.0740 back in September 2017, GBP/EUR staged a strong rebound higher to then gravitate within a trading range predominantly between €1.11 and €1.14 until January this year. GBP/EUR did hit a mini-flash-crash-low of €1.0942 in early January but then Sterling surged higher, and a fresh 22-month high of €1.1805 triggered in March. The uptrend lost steam though, and GBP/EUR fell back to towards €1.15 before attempting a second run at a sustained break above €1.18. The currency pair backtracked once again, a common technical signal known as a double top pattern emerged, and a predictable downtrend then commenced. Where to next? There is a key level lingering around the €1.1150 zone, which gave support to GBP/EUR last week, but it may be tested again. If this floor breaks, Sterling could suffer further pain and GBP/EUR could target €1.10 as its next leg lower.

From a technical standpoint, GBP/EUR appears to be in oversold conditions considering its relentless weekly decline. However, the longer the currency pair consolidates at these levels, the greater the risk of a further slump. Brexit and political uncertainty will continue to dominate, but technical indicators are suggesting a correction or extension will soon unfold.

USD

Dollar downtrend accelerates
The US Dollar has dropped to new 3-month lows against the Euro this morning as the prospect of interest rate cuts by the Federal Reserve (Fed) continues to weigh. After hitting a 2-week low under $1.12 last week, EUR/USD has bounced over 2% higher to brush the $1.14 handle today.

One main reason for interest rate cuts proposed by the Fed is the feared economic slowdown linked with the escalating US-China trade tensions. All eyes are on the G20 summit later this week when US President Donald Trump and his Chinese counterpart Xi Jinping meet. If the rhetoric remains heated on trade and no truce agreed, there is a chance Mr Trump will impose more tariffs on $300bln of Chinese imports. This will increase the likelihood of a Fed rate cut to prevent a wider economic slowdown.

EUR/USD has smashed through a key resistance level around $1.1390 and will be looking to hold the week above this mark if it aims to attempt another run at $1.15. Due to the rally in this currency pair, chiefly driven by a weaker US Dollar, GBP/USD has also climbed to fresh 4-week peaks.

US - Iran

Safe-havens swell on US-Iran hostility
A surge in safe-haven demand amidst the mounting US-Iran tensions has seen the Japanese Yen and Swiss Franc significantly strengthen. Gold, another safe-haven asset, has also soared 10% this month, to its highest level in almost six years. This clearly highlights the risk aversion in financial markets.

President Trump signed off new sanctions on Iranian leader Ayatollah Ali Khamenei, which has sparked more uncertainty and fear into financial markets. The US Dollar, commonly classed as a safe-haven currency, has surrendered its status to the JPY and CHF, both of which are appreciating across the board. GBP/JPY is hovering near 6-month lows, as is GBP/CHF, which has fallen a dramatic 7.8% in the last 36 trading days.

The stand-off between the US and Iran will continue to trouble investors and impact risk sentiment. This won’t bode well for Sterling either as it continues to trade much like an emerging market currency due to its sensitivity to politics. Therefore, investors may shy away from the “risky” pound if geopolitical tensions rise.


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