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Currency Market Analysis

Sep 10, 2019 | Currency Market Analysis

Global Themes

GBP/USD hits 6-week high before wage data
- UK GDP beat, wages up next
- Choppy sterling swings with political chaos
- Euro steady before ECB Thursday

UK GDP

UK GDP beat, wages up next
Traders betting on sterling extending its recovery will be keeping a close eye on UK labour market data at 9:30am this morning. The pound has already bounced back around 3% against many currencies, brushing a 6-week high after hitting multi-year lows last week, hoisted higher by upbeat GDP figures yesterday.

Today, the unemployment rate is forecast to hold steady at 3.9%. Average earnings, including bonuses, are expected to have increased 3.7% y/y from the three months to July, unchanged from the prior period. Earnings excluding bonuses are forecast to have risen 3.8%, down a tick from 3.9% y/y. UK wage growth continues to outpace inflation, which is usually interpreted as positive for an economy and thus a currency, yet due to Brexit uncertainty, consumer confidence remains clouded and spending lacklustre. Nevertheless, despite Brexit uncertainty, the British Pound extended its retracement higher following unexpectedly positive GDP data yesterday. UK GDP rose by 0.3% in July, its strongest growth since January, beating median forecasts of 0.1%. Fears that Britain is sliding into recession eased slightly, although the rolling 3-month GDP data up until July shows the economy is still flatlining at 0% growth.

GBP/USD is floating around the $1.2380 area, over four cents higher than last week’s low but still ten cents lower than where it was in May. The next hurdle to the upside is arguably around $1.24, but a key upside target this week is potentially $1.25. GBP/EUR could look to target €1.1250 before facing resistance. More positive economic data will be key in supporting any further uplift. Meanwhile, due to improved risk sentiment, the Japanese Yen is weakening and GBP/JPY is up nearly 5% since last Tuesday. 

GBP

Choppy sterling swings with political chaos
The major influence on sterling’s value remains Brexit and as a result investors were increasing their bets of expected volatility in the currency market around deadline day of October 31. However, implied volatility - a gauge that measures the expected variation in the exchange rate over the next three months, has fallen considerably since MPs successfully passed new legalisation which seeks to prevent a no-deal Brexit from unfolding on October 31.

The bill, which expects Prime Minister Boris Johnson to request a Brexit extension if he can’t reach a deal with the EU, was approved by Britain's Queen Elizabeth yesterday. The PM will be in contempt of court if he fails to obey the law. Sterling has reacted positively as no-deal fears have receded. Therefore, expectations for sterling price swings have pulled back from post-EU referendum highs as a result. Meanwhile in Parliament last night, PM Johnson lost a second attempt to hold a snap general election as he needed the backing of two-thirds of MPs (434), whilst only receiving 293 votes in favour of the election. Furthermore, Speaker of the House, John Bercow announced he’d be stepping down, but only after October 31. MPs also passed a motion demanding the PM release all communication relating to no-deal Brexit planning and the decision to prorogue Parliament.

Parliament is now suspended until October 14 but negotiations between the government and EU are still taking place. The EU summit on October 17-18 is the next pivotal date whereby the PM is expected to request an extension to Article 50 before his October 19 deadline to do so. Sterling may attempt a stretch towards $1.25 versus the US Dollar and €1.1250 versus the Euro from a technical viewpoint. Any uplift may be limited though given the risk of a general election in November or even the refusal by the EU to grant another Brexit delay.

EUR

Euro steady before ECB Thursday
The Euro remains relatively stable ahead of the main market event this week. The European Central Bank (ECB) is expected to cut its deposit rate by 10-basis points, with some investors hinting a surprise 20-basis point cut is even possible. This would likely hurt the Euro in the short-term as traders may borrow the cheaper Euro to fund purchases of higher yielding but riskier assets, this is known as a “carry trade”.

There is a split opinion amongst analysts and investors as to what the ECB will do to help support the struggling Eurozone economy. Rate cuts and more quantitative easing (QE) is forecast but to what extent could have either a positive or negative effect on the common currency. If the ECB does focus on more rate cuts than QE, hoping to steepen the yield curve, then the possible depreciation of the Euro may be short-lived and give rise to increased demand in the future, particular if the so-called carry trades are unwound during times of heightened geopolitical uncertainty and risk.

Despite the mixed outlook for the future of the Euro, EUR/USD edged higher yesterday and may look to tackle the $1.11 resistance mark. It’s unlikely the currency pair will trade too far away from the $1.10 zone though ahead of the key ECB meeting on Thursday.


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