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Currency Market Analysis

Nov 29, 2019 | Currency Market Analysis

Global Themes

Eurozone inflation a key focus today
• Data dump amid thin liquidity
• How high might sterling rise?


How high might sterling rise?

Although there is a growing expectation of a Conservative Party majority in the UK general election next month, we shouldn’t confidently assume this means a long-term sterling recovery. That said, the pound has consolidated at higher levels since soaring in October, largely on the anticipation of a Tory victory and a Brexit breakthrough. However, upside potential from here remains unclear given the uncertainty of the transition period and UK economic health in 2020.

The pound has enjoyed an upbeat start to the last quarter of the year on hopes of a Brexit breakthrough and an end to short-term uncertainty. Both GBP/USD and GBP/EUR are up over 5% over the last two months and continue to hold onto most of those gains. Forecasts for sterling to rise on a Conservative majority suggest GBP/USD could challenge new year highs above $1.34 and GBP/EUR above €1.18, perhaps on towards €1.20. An uplift in sterling demand, witnessed after a major poll revealed a 68-seat strong majority, saw GBP/EUR reach close to 7-month highs yesterday. But with two weeks still to go and a particularly volatile electorate, investors remain cautious. An important point to consider for the future is whether any further sterling gains will hold into next year.

• The UK still faces uncertainty surrounding the time-sensitive UK-EU trade agreement, currently required to be achieved before the end of the transition period in Dec 2020. Moreover, slowing growth and potential interest rate cuts by the Bank of England will dampen GBP demand. With this in mind, demand for 'put' options (to sell the pound in the future) are now outweighing demand for 'call' options (to buy sterling).


Data dump amid thin liquidity

It’s a relatively busy day of data amid a likely less liquid FX market due to Thanksgiving and Black Friday. It being month-end may also spark some punchy, seemingly random, moves in the market as portfolio managers rebalance their portfolios in a holiday thinned market environment.

Less liquidity in the FX market combined with a raft of important data and potential  political developments, enhances the risk of large and erratic price swings. Today, Eurozone Harmonised Index of Consumer Prices (HICP) will be released at 10:00am. In the Eurozone, the HICP is an indicator of inflation and price stability for the European Central Bank (ECB), and an increase is expected in both core and headline of 1.3% and 0.9% y/y respectively. Though this could support the Euro from further downside risk, the figures are still well below the ECB’s target level of near to but below 2%. German HICP yesterday did rise slightly in November but marked seven straight months below the ECB’s target.

• EUR/USD continues to hover around $1.10 whilst GBP/EUR is looking to clinch its highest weekly close since early May.

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