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Currency Market Analysis

Jun 14, 2019 | Currency Market Analysis

Global Themes

Stunned Sterling awaits Carney's comments
- Sterling pops and drops on politics
- US data in focus ahead of Fed next week
- Rebound in EUR/USD hits a ceiling 
- CAD oscillates with oil


Sterling pops and drops on politics
Boris Johnson won the first round of the Conservative leadership contest yesterday receiving 114 votes of the party’s 313 MPs and cementing his position as the clear frontrunner to becoming the UK’s prime minister. Sterling reacted positively before reversing sharply as GBP/EUR lingers near 5-month lows this morning and GBP/USD looks set for another weekly decline.

Although the leadership race has a way to go, the lack of movement in the currency market suggests investors are prepared and anticipating a win for Mr Johnson. Candidates Jeremy Hunt and Michael Gove finished second and third with 43 and 37 votes respectively. Three candidates have fallen at the first hurdle after failing to get the 17 votes needed to progress. Further ballots take place over the next few weeks to whittle down the number of candidates to two by month-end. The uncertainty surrounding UK politics and the Brexit process has dragged Sterling circa 4% lower against most major currencies since early May and the underlying fear of a no-deal Brexit is keeping a lid on any meaningful Sterling recovery.

GBP/USD remains suppressed by the key $1.2750 resistance level and is slipping back towards $1.26 as a result. In addition to the political pressures, Sterling may react to Bank of England (BOE) Governor Mark Carney’s scheduled speech at 1:55pm today, ahead of the BOE policy meeting next Thursday.


US data in focus ahead of Fed next week
US retail sales and industrial production data are amongst the main risk events on the calendar today. Slated in for 1:30pm, these key data releases will be closely scrutinised by traders betting on the next policy move by the US Federal Reserve (Fed). If retail sales data meets or beats the optimistic forecast, the dollar could build on its weekly gains.

After last week’s selling pressure dragging USD lower across the board, the world’s most dominant reserve currency is back on the offensive this week. The US Dollar index, tracking the value of the dollar against a basket of currencies, is flirting with the $97.0 handle after slumping to 3-month lows last Friday. The dollar remains at risk of further downside though if next week the Fed hints at a rate cut at its July policy meeting.

That makes today’s key US data important to watch, as traders continue to speculate on future monetary policy in the US. The current probability of a Fed rate cut in July now stands at 90% according to CME Group data.


Rebound in EUR/USD hits a ceiling
Eurozone industrial production dropped 0.5% in April, exacerbating fears of a prolonged economic slowdown in the bloc. GDP growth could soon lose pace, and the European Central Bank (ECB) may have to intervene as it alluded to in its policy meeting last week. The Euro has depreciated as a result, after testing 11-week highs earlier in the week against the US Dollar. However, GBP/EUR remains anchored near the €1.12 handle, highlighting the lack of appetite to hold the political charged pound.

The Euro’s upward momentum has stalled amid rising geopolitical concerns both internally and externally. External risks include the escalating US-China trade tensions and US-Iran geopolitical tensions, both hurting risk appetite. The Euro, once deemed a safe-haven currency, has weakened over the week as demand for other safe-haven currencies like the Japanese Yen, Swiss Franc and US Dollar swell. Internal risks include the EU-Italy budget dispute, which could see disciplinary measures enforced on Rome if no new commitments to EU fiscal rules are offered up.

The Euro has suffered a bout of selling pressure as a result of these economic and political factors. EUR/USD has slipped back below $1.13 and probing the 100-day moving average support level around $1.1270. If this breaks convincingly, the pair could extend its downward trajectory abruptly.


CAD oscillates with oil
The Canadian Dollar caught a fresh wave of demand after the sudden rise in oil prices yesterday. Oil, one of Canada’s biggest export commodities often influences the value of the so-called “loonie”. The loonie briefly spiked higher against multiple currencies, however the trend lacked traction as swelling crude stockpiles capped the oil uplift. GBP/CAD tested the C$1.68 threshold before reversing back above C$1.69.

Oil prices were the main attraction in financial markets yesterday following the explosions on two oil tankers in the Gulf of Oman. The potential disruption in supply meant the price of a barrel of West Texas Intermediate jumped over 3%, back above $53.0. It doesn’t make up for the plunge in prices over recent weeks though as data revealed crude inventories jumped by 15.7 million barrels last month, the largest increase for any May since 1991. The increasing supply and lack of demand for oil amidst a slowing global economy has caused prices to tumble and oil exporting nations such as Canada have endured a currency depreciation in line.

Speculation that Iran is responsible for the tanker attack is worrying leaders across the globe as tensions between the US and Iran continue to boil. Demand for safe-haven assets such as Gold has also spiked as risk aversion sweeps across financial markets. The traditional safe-haven Japanese Yen has also built on recent gains, dragging GBP/JPY back towards 5-month lows. 

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