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Forex Market Analysis

May 10, 2021 | Currency Market Analysis

Global Themes

Dollar dives, sterling thrives; the week ahead

• Sterling soars to 10-week high
• Dollar dump continues
• GBP/EUR inching towards €1.16

GBP

Sterling soars to 10-week high

Following a weak US jobs report hurting the US dollar on Friday and triggering a move in GBP/USD towards $1.40, the currency pair now has $1.41 in its sights after the weekend saw the Scottish National Party (SNP) fail to win a majority in the Scottish election.

Although the SNP missed out on an overall majority, backing from the pro-independence Green party will likely see a push for a referendum still. However, the odds of one happening before 2025 are slim, so short term political risk premium appears to have been removed from sterling’s price. GBP/USD is now trading at a 10-week high and is 1.8% stronger in May – a month in which the currency pair has fallen circa 2% on average over the past decade.

• The week ahead is focused on UK GDP and production data on Wednesday. Recent economic data suggests the contraction in UK output in the first quarter won’t be as big as first expected. This should further underscore the prospects for a very strong economic recovery in the second quarter and be supportive of the pound.

USD

Dollar dump continues

A weaker-than-expected US non-farm payrolls figure last Friday sent the US dollar tumbling to its worst daily decline of the year. The dollar index, measuring the value of the USD versus a basket of major currencies, is trading near the $90.0 handle – nearly a 3-month low. Data-wise this week includes April inflation results on Wednesday, which is a highlight.

The weaker jobs data wasn’t bad enough to squash the underlying recovery story, so although the dollar was sold off, risk appetite remains alive. Equities and commodities continue to climb higher. Riskier, but higher yielding assets are marching higher across the board in fact and the dollar is facing further downside pressure this week. Aside from the US consumer price index, the 10-year Treasury auction will be closely monitored on Wednesday and retail sales data is also in the limelight on Friday.

• EUR/USD has risen for four out of the last five weeks since rebounding off the $1.17 mark last month. The world’s most traded currency pair looks poised for a run at the $1.22 level but will soon face stiff resistance in the $1.23-$1.25 zone.


GBP/EUR

GBP/EUR inching towards €1.16

The euro is benefiting from the weaker the dollar, but not enough to hold off the strong pound as it did last Friday. GBP/EUR upside appeared to be running out of steam last week, but the currency pair is trading over 0.5% stronger before 9:00am and could test the €1.16 handle if this upward momentum builds. Still, upside will likely depend on how EUR/USD trades.

A relatively quiet week looms on the eurozone data front with the German ZEW surveys on Tuesday and industrial production figures on Wednesday unlikely to have a material impact on the euro’s value. For this reason, EUR/USD direction will most likely continue to be steered by the wider USD story. The outlook for the EUR/USD is clearly improving and as we head into the summer months, economic data should rebound too. Speculation about the European Central Bank (ECB) tapering its bond buying programme could soon start to increase, which would point to further EUR/USD upside in coming months.

• This makes the minutes of the ECB’s last monetary policy meeting more important and traders will scrutinise them closely when published this Friday.


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