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Currency Market Analysis

Jun 18, 2019 | Currency Market Analysis

Global Themes

No-deal Brexit fears continue to hassle Sterling
- Sterling’s decline deepens
- EUR/USD wrestles with $1.12
- Two-day Fed meeting starts

GBP

Sterling’s decline deepens
As the Conservative party leadership race continues, Boris Johnson’s lead grows, and Sterling’s depreciation intensifies. If Mr Johnson becomes the next prime minister, the chance of the UK leaving the EU without a deal on October 31 will likely increase. GBP/USD has already slid to 22-week lows while GBP/EUR has touched 21-week lows this morning.

The second round of voting in the leadership contest takes place today, with results expected around 6:00pm. Candidates need 33 votes or more to avoid being eliminated, but if all have more than 33, then the one with the fewest is eliminated. Another TV debate takes place this evening and more ballots on Wednesday and Thursday if needed to whittle down to two candidates. The aggressive sell-off in the pound over the past few weeks has been primarily due to this ongoing political uncertainty coupled with the increasing risk of a no-deal Brexit. According to a new Reuters poll this month, the median forecast of a disorderly Brexit has risen to 25% from 15% in May.

GBP/USD has fallen to a fresh 5-month low just shy of the $1.25 handle, while GBP/EUR continues to inch towards €1.11. The downside bias remains intact for now but any surprises from the Tory voting could spark some erratic price action later today.

EUR

EUR/USD wrestles with $1.12
Final Eurozone inflation figures for the month of May will be released at 10:00am today, but more importantly the German ZEW surveys will also be unveiled at the same time. The run of poor economic data from the Eurozone’s largest economy is forecast to continue, with the sentiment index expected to deteriorate to -5.8 in June, its lowest level since March.

The Euro attempted a recovery run against the dollar two weeks back but bumped into resistance around the 200-week moving average level at $1.1345. The 200-week moving average has proved a key support and resistance level over the past year and since surrendering its ascent at this level, EUR/USD has slumped back towards $1.12, lacking any real directional conviction. Plenty of risks haunt the common currency such as trade wars, Brexit, the Italian budget dispute and a slowing German economy, which is preventing any meaningful recovery. However, should today’s ZEW reports positively surprise, perhaps the Euro will challenge the $1.13 handle again.

Despite the pullback in EUR/USD, GBP/EUR remains on the backfoot, highlighting the lack of appetite to buy the political-charged British Pound. GBP/EUR has recorded six weekly declines and suffered its biggest daily decline since March yesterday.

Fed

Two-day Fed meeting starts
The Federal Reserve’s (Fed) two-day policy meeting kicks off today and will wrap up with a rate announcement tomorrow evening. Currently, money markets are pricing in a 20% chance of a rate cut as this meeting according to CME Group data. There is a 71% chance of a cut at its next meeting in July. The US Dollar will remain sensitive to deviations in these probabilities.

Trade war woes and rising geopolitical tensions are also driving demand for so-called safe-haven assets which include the US Dollar, Japanese Yen and Swiss Franc. Risk sentiment is being undermined by the jitters in the Strait of Hormuz after the oil tanker explosion last week and the ongoing US-China trade spat. Commodity and emerging market currencies have mostly weakened amidst these developments.

Dwindling expectations of a breakthrough in negotiations between the US and China at the G20 summit later this month, will likely continue to taint risk sentiment. 


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