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Currency Market Analysis

Jul 19, 2019 | Currency Market Analysis

Global Themes

Relief for Sterling as critical levels reclaimed
- Pound rebounds on Parliament vote
- Dollar swings with Fed speakers
- ECB to adjust inflation mandate?


Pound rebounds on Parliament vote
Sterling has bounced from 27-month lows versus the US Dollar and 6-month lows against the Euro thanks to upbeat UK data and fading no-deal Brexit risks. GBP/EUR has recaptured the €1.11 handle and GBP/USD catapulted beyond $1.25 as a weaker US Dollar helped propel the currency pair over 100 pips yesterday.

Data revealed that UK retail sales surged 1% in June, smashing expectations of another monthly decline and kick-starting a much-needed positive day for the pound. In addition to the stronger-than-expected data, UK lawmakers passed a motion to effectively ensure MPs sit in the House of Commons in the lead up to the October 31 Brexit deadline. This scuppers Boris Johnson’s ability to prorogue parliament this autumn, which could have potentially led to the UK leaving the EU without a deal. Sterling had climbed throughout the day and was little moved by the result because a no-deal Brexit is still possible if no legal mechanism is found to stop it. It is clear the pound is far from out the woods and turbulent times lie ahead as the Brexit deadline draws closer and the risk of a general election grows.

Market participants are becoming more wary of a potential resolution to this political paralysis as being a binary choice between no-deal Brexit or no Brexit at all. Both extreme scenarios could see Sterling swing 10% in either direction.


Dollar swings with Fed speakers
The US Dollar took a tumble yesterday evening after Fed Vice-Chair Richard Clarida and New York Fed President John Williams cited a need for pre-emptive action by the US central bank to deal with low inflation. Money market pricing of a 50-basis-point cut at the Fed’s policy meeting this month jumped to 70% last night, but has eased back to 48%, still up from last week’s 23% (source: CME Group).

Mr Williams has subsequently reassured markets that his comments were academic and not about immediate policy changes and the dollar has modestly recovered as a result. The dollar remains sensitive to news and comments in relation to Fed monetary policy as traders are positioned for at least three rate cuts by year-end including the 25-basis-point cut that is fully priced into the market this month. Should these probabilities change, as a result of the Fed potentially indicating a one and done attitude this month, then the dollar could rapidly appreciate as the futures market re-positions. Overnight when the dollar weakened, EUR/USD jumped towards $1.13 again. If we see a convincing break above, then an acceleration may ensue, but another failed attempt could confirm a double-top pattern, which may be a signal for further downside to develop.

Also on the radar is US-China trade talks, which is driving market sentiment. Risk appetite has improved somewhat as US Treasury Secretary Steven Mnuchin has stated in-person talks could follow the telephone discussion yesterday with Chinese officials. GBP/JPY and GBP/CHF are both up as a result of unwinding safe-haven positions.


ECB to adjust inflation mandate?
The Euro remains on the defensive following a report yesterday stating that European Central Bank (ECB) staff are looking at adjusting the bank’s inflation goal. It could embolden policymakers to stick with monetary stimulus measures for longer, hence weakening the common currency.

Currently, the ECB inflation target mandate is below but close to 2%, and it has been this way since 2003. A re-evaluation of this target will be significant and speculative traders will be weighing up whether it means easy monetary policy for longer – Euro negative, or perhaps tightening policy based on a lower inflation target - Euro positive. The Euro remains anchored near 2-year lows versus the dollar on rising expectations of more quantitative easing to support the struggling Eurozone economy. The head of Fitch rating agency has stated the ECB is likely to restart its stimulus programme along with dovish steps to be taken by other central banks such as the Bank of Japan and the US Federal Reserve (Fed).

In the absence of any top-tier economic data from Europe, the Euro may be driven by external factors including USD sentiment, which is driving EUR/USD. GBP/EUR has been boosted by an upbeat Sterling bias with eyes on a close above €1.11 to avoid an acceleration lower.

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