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Currency Market Analysis

Sep 20, 2019 | Currency Market Analysis

Global Themes

GBP/USD soars towards $1.26 and GBP/EUR towards €1.14
• Sterling surges on Brexit deal hopes
• Supreme Court ruling next week
• Fed twists as other central banks stick

GBP

Sterling surges on Brexit deal hopes

Yesterday evening saw the British Pound penetrate key resistance levels against both the Euro and US Dollar. The spike came abruptly after European Commission President Jean-Claud Juncker said a Brexit deal could be reached before October 31 if objectives are met through the alternative arrangements to the Irish backstop. Though vague, the comments saw sterling traders pounce on the optimism and GBP/USD and GBP/EUR are now trading at 2-month and 4-month highs respectively.

Once again, the sensitivity of sterling to political comments came to light yesterday, trumping the poor UK retail sales data and neutral Bank of England (BOE) earlier in the day, which had dragged GBP-currency pairs lower. The BOE left interest rates unchanged at 0.75% as expected but warned Brexit uncertainty was causing the economy to slow, damaging productivity and business investment. Retail sales data surprised to the downside, emphasising the negative impact Brexit is having on the consumer. However, the BOE did acknowledge that if the UK exits the EU smoothly then it would consider its long-term view of raising interest rates – a pound positive scenario. The risk of a no-deal Brexit still looms though, and rate cuts to support the economy would be a pound negative scenario. Mr Juncker helped to reduce those worries with his optimistic comments of a deal before the current Brexit deadline though, triggering sterling’s rally.

• GBP/USD still lingers 1.5% lower on the year, but has risen 5% since the start of the month.  A Brexit deal coupled with a BOE rate hike next year could see the currency pair shooting towards $1.40 and GBP/EUR towards €1.20. That said, until a deal is agreed and passed through UK Parliament, a no-deal Brexit still clouds sterling’s outlook. Eyes are fixed on today’s talks between key UK and EU Brexit negotiators.


Supreme Court ruling next week

Another important focus this week has been Britain’s Supreme Court proceedings on whether Prime Minister Boris Johnson acted unlawfully when he suspended Parliament for five weeks in the run-up to Brexit. The ruling is now expected to be delivered next week and if it goes against the PM, then Parliament could be recalled ahead of schedule.

It’s unclear how the pound will react if the government loses the case and MPs return to Parliament. On the one hand, it could help support an extended uplift for sterling as it could further reduce the risk of a no-deal Brexit on October 31. On the other hand, political turmoil is likely to erupt, and MPs could increase pressure on the PM to step down, even if a Brexit deal is close to being reached. This could be seen as a sterling-negative scenario as investors ponder the potential outcome of a general election.

• Alternatively, the PM might not be forced to recall Parliament and things just carry on, or perhaps he will attempt to prorogue again. It is a unique case, and we will be entering uncharted territory if the government loses.

USD

Fed twists as other central banks stick

It’s been a busy week of central bank decisions this week, but only the US Federal Reserve (Fed) cut interest rates in the latest twist in monetary policy to support weaker global growth. The US Dollar actually rebounded higher on Wednesday though as some investors were hoping for further rate cut signals by policymakers.

The Swiss National Bank, the Bank of England and the Bank of Japan all kept monetary policy unchanged yesterday, while the Norges Bank increased rates by 25-basis points as anticipated. The dollar has since suffered a wave of selling pressure, perhaps because the Fed broke the mould this week, narrowing the monetary divergence gap. However, another story being attributed to reduced dollar demand is the Fed’s intervention in the US money markets for the third day running. The Fed has injected over $200 billion in temporary cash into the banking system since Tuesday and the increase in supply of dollars likely prompted investors to sell in favour of other currencies, thus weakening the value of the USD.

• EUR/USD continues to oscillate between $1.10 and $1.1070 this week as traders weigh up the huge stimulus package by the European Central Bank last week and the Fed’s rate cut and interventions this week. A clean break of the $1.11 handle will be a strong signal for further upside next week.


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