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Currency Market Analysis

Sep 06, 2019 | Currency Market Analysis

Global Themes

From 3-year lows to 3% jumps, sterling remains sensitive to politics
- Sterling’s recoil uncovered
- Next week in Parliament
- Dollar selling stalls before US jobs report

GBP

Sterling’s recoil uncovered
Except for the notorious flash crash of October 2016, GBP/USD fell to its weakest level since 1985, below $1.20, as the threat of a no-deal Brexit and snap general election weighed on sterling. GBP/EUR was also languishing under €1.10 and hovering near multi-year lows against plenty of currency rivals. However, driven by Brexit optimism and UK political drama, the pound has staged a valiant comeback this week, springing over 3% against the US Dollar since recording its 3-year low.

Given that traders were so “short” sterling – i.e. taking negative bets on GBP with the expectation that it would fall in value – there was always a growing risk that sterling would soon rebound with a vengeance on profit taking. Data from the Commodity Futures Trading Commission (CFTC) showed short GBP positions in August rose to levels only seen during brief time periods in 2016 and 2017 over the past decade. The catalyst to drive this bounce in the pound, otherwise described as an “unwinding” of these sterling short positions, was the passing of the legislation to block a no-deal Brexit this October. Diminishing hard-Brexit fears fuelled fresh demand for sterling but also likely triggered profit taking on those short sterling positions, which is probably why we’ve witnessed the +3% uplift in GBP/USD over the past couple of days.

There could certainly be some room for further uplift, particularly if a general election is put off until after the next Brexit deadline of October 31. In reality though - the further delay doesn’t resolve the outstanding Brexit issues and Parliament remains in a state of paralysis when it comes to agreeing a withdrawal agreement to exit the EU. A trip back below $1.20 and €1.10 versus the dollar and Euro respectively should therefore not be ruled out entirely.

Next week in Parliament
Turbulent UK politics continues to steer sterling’s trading direction. Consequently, the politically sensitive currency is said to be trading like that of an emerging market currency - making it harder to track and forecast. However, the received wisdom is a no-deal Brexit will damage the pound and a deal or no Brexit will boost the UK currency. Next week is gearing up to be another dramatic week in Parliament, with traders braced for potentially more volatility.

  • Rumour has it, the government plans to bring the same motion it tabled this week back to the House next Monday to try and trigger an election. If successful, the earliest possible date to hold an election is October 15.
  • However, under the Fixed-term Parliaments Act, the government still needs a two-thirds majority to pass and there appears to be divisions in the Labour party about whether to support the motion.
  • Not only do some MPs want the no-deal bill passed into law (as expected today) but some want an extension with the EU to be secured before agreeing to a general election.
  • There is speculation that opposition parties are uniting to push for a general election on October 29 instead. This way, PM Johnson is expected to have requested a delay to Brexit at the EU summit on October 17, therefore avoiding a no-deal scenario on October 31. (However, there is no guarantee the EU will accept the extension, meaning the no deal risk remains firmly on the table).
  • Alternatively, PM Johnson could call a no-confidence vote in his own government. If it loses the confidence vote, the opposition has 14 days to form a new government. If unsuccessful, the earliest possible election date is October 29.


USD

Dollar selling stalls before US jobs
The pivotal monthly US jobs report will be released at 1:30pm today. A big miss or beat of the forecasted data could ramp up volatility in USD-denominated currency pairs. EUR/USD currently resides above the $1.10 handle after slumping to fresh 28-month lows earlier this week. Meanwhile, GBP/USD is perched atop $1.23 after rising from the doldrums of sub-$1.20 (3-year lows) earlier this week.

A 25-basis-point cut in interest rates by the US Federal Reserve (Fed) is fully priced in for its September policy meeting and the probability of a 50-basis-point cut now stands at 0% from 30% last month (source: CME Group). This probability could swing in either direction in the aftermath of today’s critical data, and the dollar’s reaction will be telling. The US non-farm payrolls figure for August is expected at 158,000 compared to the 160,000 count in July, whilst average earnings are expected to drop a tick lower to 3.1% from 3.2% y./y. The data could weigh on the already weaker US Dollar this week, as its index, which measures the dollar’s strength against a basket of currencies, suffered its third successive day of losses yesterday and appears fragile today.

A surprisingly positive figure would suggest labour market conditions remain robust amidst rising global trade tensions, perhaps trimming expectations of future Fed rate cut bets. This could help support the dollar’s recent descent and prevent EUR/USD from a run at the $1.11 handle, while GBP may slip back towards $1.22 again before the end of the week (though Brexit remains the main driving force behind GBP/USD sentiment).


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