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Currency Market Analysis

Nov 14, 2019 | Currency Market Analysis

Global Themes

Markets expect fireworks in December
• Sterling’s steady streak
• Ignore retail sales too?
• Germany dodges recession

GBP

Sterling’s steady streak

Since the UK general election was confirmed at the end of last month, the pound has traded in a sideways manner lacking any clear directional impetus. Ignoring economic data and buoyed by politics and polling, volatility may not pick up until December.

The parabolic rise in October, which saw GBP/USD catapult eight cents higher amid soaring sterling volatility, has since calmed. Unless we witness a drastic change in the political sphere, sterling may continue to consolidate within a narrow trading range until the December 12 election date. This time last month, GBP/USD had already charged over five cents and we’d already experienced six days of a +1% daily range. November volatility has eased off though, and GBP/USD has only recorded a daily trading range above 1% on just one occasion month to date. However, implied volatility, which reflects how much exchange rates are expected to change over different time periods, reveals that currency volatility risk is creeping higher, particularly now that the 1-month expiry captures the UK election. This corresponds to the theory that after the election result emerges, sterling could experience some major shifts in value.

• Sterling may be at a critical crossroad – hovering at either the top or bottom of a future trading range to come. Regrettably, it seems only the election and the Brexit outcome will determine which route Sterling takes and therefore forecasting this path remains difficult.

Ignore retail sales too?

The pound has largely shrugged off the important economic data released so far this week. Up next is retail sales though at 9:30am. Expectations of a pick-up in October by 0.2% m/m and by 3.7% y/y, from 0.0% and 3.1% previously, could support the pound, but any reaction may be limited.

Despite data this week revealing the UK economy grew at its slowest annual pace since 2010 in the third quarter, wage growth continues to cool, and inflation dropped to a 3-year low in October, the pound barely budged. However, slowing price growth will likely add to speculation that the Bank of England (BOE) could cut interest rates. Although the BOE voted to keep rates unchanged last week, two policymakers voted for a cut.

• Today, UK retail sales data may offer some respite from the less-than-inspiring data of late. This will provide a key measure of how the wider economy and consumer spending are faring amidst such uncertain economic and political times.

EUR

Germany dodges recession

In a modest boost for the Euro – the German economy grew 0.1% in the third quarter of the year, defying expectations of another quarterly contraction. As a result, the German economy has avoided the technical definition of a recession and the Euro has crept back above the $1.10 handle versus the US Dollar. Eurozone flash Q3 GDP drops in at 10:00am today.

The 0.1% GDP print still isn’t much to cheer about, but given the more upbeat nature of recent economic sentiment and conditions surveys (ZEW surveys) earlier this week, there is some hope for further improvement on the horizon. Furthermore, a large part of the German and Eurozone economic slowdown is due to ongoing trade tensions and the subsequent global economic downturn. With the US-China close to securing a phase one trade deal, this may help the Eurozone towards recovery. Even recent data showed German exports were up by 1.5% in September and new manufacturing orders up by 1.3%.

• EUR/USD dipped under $1.10 last night but has since reclaimed the pivotal handle, whilst GBP/EUR lingers just beneath 6-month highs. Traders will turn their attention to the Eurozone GDP figures later this morning, which may help hoist the Euro higher if the result follows that of Germany.


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