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Currency Market Analysis

Jun 21, 2019 | Currency Market Analysis

Global Themes

Is Sterling's downtrend over? Pivotal levels in focus
- Sterling sways on BOE and Boris
- Eurozone services PMI is key
- Will US PMIs support the dollar?
- Oil rally boosts CAD, NOK and ZAR


Sterling sways on BOE and Boris
Bank of England (BOE) policymakers voted 9-0 to keep interest rates at 0.75% yesterday. A hawkish surprise was hoped for by optimistic GBP traders, but the BOE held steady as well as downgrading growth forecasts to 0% for the second quarter of this year.

As a result, the gains GBP/USD made after a dovish Federal Reserve (Fed) meeting on Wednesday, began to unwind. After spiking to 2-week highs atop $1.27, GBP/USD recoiled back towards the $1.26 handle. The BOE stated concerns over global trade disputes and Brexit risks to the economy. Choppy trading conditions developed thereafter as UK politics and rising geopolitical tensions took hold of sentiment. Hard-line Brexiteer Boris Johnson is most likely to become the next Tory leader and UK PM after he won 160 votes last night to make it to the final shortlist of Tory candidates with Jeremy Hunt who won just 77 votes. The circa 160k Tory members will vote on the final two candidates in a postal vote, with the winner announced in the week commencing July 22.

From a technical standpoint, GBP/USD will be looking to close the day above at least $1.2710, preferably $1.2750 to confirm a trend reversal higher. The currency pair has climbed over 1% this week, bouncing off the key $1.25 support, but remains stuck in a downtrend channel for now.


Eurozone services PMI is key
Flash Eurozone PMIs are key risk events today. German manufacturing PMI drops in at 8:30am and is expected to remain in contraction territory this month. This is likely to drag on the Eurozone’s overall figure too, which will be released at 9:00am. Should the results meet forecasts, the Euro could weaken off today.

Although the manufacturing sector remains vulnerable to ongoing global trade tensions, the services sector is still supported by strong domestic demand. However, the European Central Bank (ECB) raised concerns about the longevity of this support, warning persistent poor manufacturing might influence the services sector. Consequently, there will be increased interest in the services PMI figure today, which is forecast unchanged at 52.9. Any hint of weakness in the services sector could see the Euro surrender its recent gains against the dollar, dragging EUR/USD back towards $1.12.

The pound is battling it out to snap a 6-week losing streak versus the Euro with €1.1235 the key level to beat. GBP/EUR has dipped to fresh 5-month lows this week but catapulted towards €1.13 again on dovish ECB signals. If GBP/EUR records another weekly decline, the risk of further downside will increase.


Will US PMIs support the dollar?
The US Dollar looks set to give up all last week’s gains against a basket of currencies, as the dovish Federal Reserve (Fed) meeting accelerated dollar selling. In fact, the US Dollar index suffered its biggest 2-day drop in a year.

With two rate cuts before year-end now priced into the market, there is a now an increasing chance of a 50-basis-point cut at its July meeting. CME Group data shows a 30% chance of this occurring, which has further weighed on the dollar this week. Today, a slew of US PMI figures will be released at 14:45. Both services and manufacturing sectors are expected to remain in expansion, which could cushion the dollar’s decline today given the mixed bag of PMIs expected to come out of Europe this morning.


Oil rally boosts CAD, NOK and ZAR
The Canadian Dollar climbed to 3-month peaks against its US counterpart yesterday, while GBP/CAD extends its 7-day fall to fresh 7-month lows. The price of oil, one of Canada’s main exports, jumped on the news that Iran shot down a US military drone, which boosted the CAD and other commodity currencies.

A barrel of West Texas Intermediate staged its biggest daily gain since January, popping over 4%, contributing to its 12.5% ascent since the low of the month. Also to benefit from the rise in oil is the Norwegian Krone, as Norway’s economy relies a vast amount on its oil exports. The NOK was given an additional boost after the Norges Bank hiked interest rates to 1.25% from 1.00% yesterday and also signalled further hikes may be needed.

In addition, GBP/ZAR has dropped over 2% this week due to the rally in the price of gold amid rising tensions in the middle east fuelling safe-haven demand.

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