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Currency Market Analysis

Oct 14, 2019 | Currency Market Analysis

Global Themes

Further volatility expected as Brexit talks heat up
- Intense technical talks continue
- EU summit Oct.17-18
- Special parliamentary Saturday sitting

US - China

US-China trade progress
If no agreement is achieved before Oct.15 then a scheduled hike in tariffs by the US on Chinese goods is expected to take effect. However, US President Donald Trump stated a ‘Phase 1’ trade deal has already been agreed – improving risk appetite in financial markets.

Though this Phase 1 agreement is unlikely to boost the outlook for global trade and economic growth, it does signify an interim trade truce between the world's two largest economies. Subsequently, safe-haven currencies like the JPY and CHF have been sold as risk-on market sentiment prevails. Meanwhile, high relevance data from China will also be released this week, with inflation due on Tuesday morning and retail sales, industrial output and third quarter GDP results slated in for Friday morning. Investors will examine the data closely for signs that the ongoing US-China trade tensions have further damaged the global economy.

Brexit

Crunch week for Brexit
The latest Brexit end game will run into the EU summit on Thursday and Friday. All the upbeat chatter around an agreement being reached sent sterling soaring last week, but if a deal isn’t formally agreed by Friday, UK PM Boris Johnson is expected to seek a further Brexit extension and sterling will likely recoil. Traders also await a special parliamentary sitting this weekend, being referred to as “Super Saturday”.

Last week, the British Pound posted its biggest 2-day rally since before the EU referendum after the UK made a concession relating to the Irish border, increasing hopes of a Brexit breakthrough. It was proposed that there would be no border in Ireland, but instead there would be a system in which Northern Ireland remained in the UK customs union, but customs and regulatory checks be completed at the Irish Sea. Both the EU and UK sounded positive and investors began exiting short (to bet against) GBP positions and buying the cheap pound. GBP/USD began Thursday at $1.22 and ended the week over 4% higher flirting with $1.27. GBP/EUR surged towards €1.15, up 7% since the August low near €1.07. Over the weekend though, pessimism began to swell once more as EU officials voiced their concerns over the new customs proposals. Talks continue today and likely up until the EU summit on Thursday.

It appears there is still a long way to go before a real Brexit breakthrough and already this morning the pound has weakened against many currency peers.

If talks breakdown, GBP/USD could quickly fall back towards $1.22 again and GBP/EUR back towards €1.11. However, if a deal is agreed, expect sterling to continue climbing, with upside targets of $1.30 and €1.17 against the dollar and Euro respectively.  

UK data

UK macro data likely overshadowed
Though Brexit-related news will dominate, UK labour market data is due on Tuesday and has been a positive element of the UK economy of late.

Wages are accelerating at decade high paces and the unemployment rate lingers near to 44-year lows. UK inflation will be released on Wednesday and retail sales data drops in on Thursday. A slew of positive data could help sterling rally this week, though if Brexit talks breakdown, investors will likely sell the pound and GBP-denominated currency pairs could be at risk of deeper declines. 

European data

European data dump
Positive Brexit news will also help buoy the Euro given the close economic ties between the UK and Eurozone. Last week, EUR/USD lifted further north of $1.10 amid the Brexit optimism and a weaker US Dollar.

This week, industrial production figures will be released today at 10:00am, inflation data from France will be released on Tuesday, following the German release last Friday. German ZEW surveys are also revealed on Tuesday with expectations of sentiment further deteriorating in Europe’s economic powerhouse. Inflation from the Eurozone as a whole will be unveiled on Wednesday and expected still some way off the European Central Bank’s close to but below 2% target.


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