Forex Market Analysis

Jan 25, 2022 | Currency Market Analysis

Global Themes

Dollar & yen jump, sterling slumps

• Global business activity slows
• Equity slide hurts riskier currencies
• Reversal concerns for GBP/EUR

Delivered by George Vessey

Global

Global business activity slows

Flash industry PMI prints from the UK, Europe and the US disappointed yesterday as inflation remains a key concern with businesses saying the price of goods and services had risen at the fastest rate since the survey started in 2002. Along with Covid-19, this likely weighed on private sector growth.

In the US, the composite PMI slumped to 50.8 in January, from 57.0 in the previous month - the slowest pace of expansion in business activity since July 2020. The flash estimates also revealed the slowest growth in new orders since the same date and in factory activity in 15 months. Both UK and Eurozone private sector output growth slumped to an 11-month low, while cost pressures stayed high. As well as inflationary concerns, firms cited labour and material shortages slowing output in manufacturing and services. Assuming new variants don’t emerge, the easing of restrictions across the regions should support the resumption of economic activity and prices could remain elevated, pressuring central banks to tighten monetary policy.

  • The pace of central banks’ rate hike cycles is expected to drive currency valuations this year and fuel more volatility. This is currently being amplified by geopolitical jitters, sparking demand for safe havens assets such as the Japanese yen. GBP/JPY is down about 3% from its January peak.

Volatility

Equity slide hurts riskier currencies

Heightened volatility across equity markets is spilling over into currencies amid concerns about tightening monetary policy and increasing tensions on the Ukraine-Russia border. Global stock markets are reeling, whilst bonds and currencies are mixed.

The British pound fell to its lowest level in three weeks versus the US dollar yesterday – hitting the downside target near $1.3450 before bouncing higher. The correlation with US equity markets is starting to pick up again as risk-sensitive sterling slides in line with Wall Street. Multiple stock indices have dipped into correction territory – 10% below a recent high – whilst China’s CSI 300 entered a bear market. Wild swings were expected in 2022, but perhaps not so soon. The market is bracing for a US Federal Reserve announcement tomorrow night that could signal the removal of its vast stimulus programme, which, along with geopolitical turbulence, has caused the VIX index (a so-called fear gauge measuring expected volatility in equity markets) to rise to its highest in 12 months.

  • Risk aversion remains prominent this morning as evidenced by weakness in commodity-linked and EM currencies, whist the US dollar and Japanese yen hold firm against their peers.

Euro

Reversal concerns for GBP/EUR

After six successive weeks of gains, rising 3.3% in that time, sterling suffered a weekly loss versus the euro last week and a potential reversal signal is forming dependent on the closing price this week.

GBP/EUR clocked a 1% trading range and on the weekly candlestick chart, the price action saw GBP sellers overwhelm buyers, which forced GBP/EUR to end the week lower, despite hitting fresh 23-month highs. As the recent trend has been higher, this chart pattern could be a sign of an upcoming trend reversal, but from a fundamental perspective, the UK-EZ rate differential should favour sterling in the long term.

  • The €1.20 level remains a significant area of resistance, but this doesn’t mean it can’t be comfortably breached this year. Keep an eye on the January closing price – above €1.1944 (the 100-month moving average) would be a bullish signal indicating further upside.


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