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Currency Market Analysis

May 17, 2019 | Currency Market Analysis

Global Themes

GBP/EUR at a crossroads before Eurozone data
View our Brexit Scenario Guide  here

- Euro soft ahead of inflation
- Sterling’s tumble rumbles on
- Risk aversion yields Yen rally

EUR

Euro soft ahead of inflation
Today’s economic calendar lacks any significant market moving news other than Eurozone inflation at 10:00am. The final Harmonised Index of Consumer Prices (HICP) for April is forecast to hold steady at 1.7% y/y but dip to 0.7% from 1.0% m/m. The Euro may come under selling pressure and allow GBP/EUR to clamber back towards €1.15 ahead of the weekend, though if €1.14 gives way, the currency pair could slide back towards €1.13 abruptly.

Despite data this week revealing the German economy grew 0.4% in the first quarter of the year, up from 0% in Q4 of 2018, there are still growing concerns about the growth outlook in the Eurozone as a whole. Markets are now beginning to price in a 30% chance of a rate cut by the European Central Bank (ECB) before the end of 2019. This reflects a sharp shift from last year when investors were bracing for a rate hike by the ECB after the summer of this year. The ECB is one of few central banks to already have negative interest rates but the pressure to cut further may ramp up if growth indicators fail to significantly improve and inflation continues to soften.

This makes today’s Eurozone inflation report important and market participants will speculate on future monetary policy decisions should the data exceed expectations or disappoint. EUR/USD has suffered four straight daily declines and resides back under $1.12. If $1.1170 breaks, the currency pair could collapse towards $1.11 and test a move below.

GBP

Sterling’s tumble rumbles on
Sterling suffered yet another day of losses as Prime Minister Theresa May confirmed the timetable for her departure will be set out in early June. PM May will try for a fourth time to get her Brexit deal approved in Parliament beforehand, with UK lawmakers expected to debate and vote on the Withdrawal Agreement in the week commencing June 03. GBP/USD fell to fresh 3-month lows sub-$1.28 and GBP/EUR flirted with the €1.14 handle.

The slide in Sterling continues as UK political turmoil rumbles on. Both Brexit and the Ms May’s future hang in the balance and market participants are becoming jittery. A key Brexit campaigner, Boris Johnson, announced he will stand as a candidate to replace Ms May as the new Conservative party leader. If Mr Johnson took control of the Brexit process, the probability of a hard exit or so-called “no-deal” Brexit will likely increase. Historically, Sterling has tumbled in such circumstances and many traders are wary of the currency collapsing to post-referendum levels below $1.20 versus the US Dollar and €1.10 versus the Euro. GBP/EUR has already recorded its longest daily losing streak against the Euro since the turn of the century, despite the Euro performing poorly against many other major currencies.

Sterling sentiment is sour, and Brexit remains the key driving force behind its attractiveness. The UK docket is data-dry today so Brexit, politics and US-China trade developments will continue to steer GBP currency pairs ahead of the weekend. Next week, traders brace for the EU election, which is being considered as a proxy referendum on EU membership and may trigger currency volatility.

JPY

Risk aversion yields Yen rally
One of the major market movers of late has been the flare up in the US-China trade war, sparking risk aversion, which has seen demand for the safe-haven Japanese Yen soar. GBP/JPY is down 2% this week and 3.6% in the last 4 weeks. Over the last 12 months, GBP/JPY has fallen nearly 6% and is perched around the key ¥140.0 handle this morning.

Despite the worries of a flash crash unfolding, due to low liquid conditions in late April and early May, the market reaction to escalating trade war tensions has in fact been relatively modest. However, the Yen has been marching higher against its major currency peers as investors seek out safer assets in times of heightened uncertainty. The US raised tariffs on Chinese goods, China retaliated with tariff hikes on US goods and the knock on effect across the globe was certainly felt. The Australian dollar, closely linked to the state of China’s economy, has suffered a wave of selling pressure this week, exacerbated by the negative impact on the Australian economy amidst the global economic slowdown. Money markets are now pricing in over an 80% chance of a rate cut by the Reserve Bank of Australia in June to help stimulate growth and boost the labour market.

GBP/AUD is stretching back towards A$1.86 while GBP/CNY is also climbing as demand for the Chinese Yuan slumps as a result of the US-China trade spat. Elsewhere, the Canadian Dollar is strengthening, helped by the recent uplift in oil prices. The price of oil, one of Canada’s main exports, has spiked higher recently due to rising tensions in the Middle East. GBP/CAD is down 1.2% on the week as a result and flirts with the C$1.72 level this morning.


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