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Currency Market Analysis

Jul 18, 2019 | Currency Market Analysis

Global Themes

No-deal Brexit threat grows, adding to Sterling's woes

GBP/USD

Heavy selling haunts Sterling

The relentless selling of the pound continues as a fresh 27-month low against the US Dollar and 6-month low against the Euro printed yesterday. The fear of a no-deal Brexit is rising, and market participants are actively positioning for it by selling the pound. GBP/USD might soon threaten the key $1.20 level while GBP/EUR could fall back under €1.10 and attempt a new year-to-date low.

Until recently, many investors have steered clear from taking big speculative positions on the pound, but as Boris Johnson, favourite to be the next UK Prime Minister, considers suspending Parliament to force Brexit through on October 31, investors are beginning to prepare for an even bigger Sterling depreciation. If Mr Johnson delivers his plan to schedule a Queen’s Speech at the start of November, it would prevent MPs from voting against a no-deal Brexit as convention is that the House of Commons is suspended in the two weeks prior to it. Both Mr Johnson and his rival Jeremy Hunt hardened their Brexit stances earlier this week, stating the current withdrawal agreement is dead. This sent Sterling into a spin and yesterday GBP/USD extended its decline to 2% this month alone.

A recent spike in three and six-month implied volatility tells us traders are expecting large swings in Sterling in the build up to and around the October 31 date. Furthermore, despite the increase in short GBP positions (betting on Sterling falling), the net short market position is still far from extreme levels seen in the past. This suggests the pound is still at risk of further downside if traders build on these short-GBP positions.

GBP

Keep an eye on UK retail sales

Although Brexit headlines continue to drive Sterling sentiment, traders will also watch out for UK retail sales data dropping in at 9:30am today. It’s a quiet day on the data calendar for the rest of Europe with focus pinned on Brexit rhetoric.

UK retail sales data for June is forecast at 2.6% y/y, up from 2.3% previously, while the month-on-month median forecast is a fall of 0.3%, slightly less steep than the 0.5% fall in May. There is a risk that the minimum forecast of a 1% fall prints this morning, which could reignite downside risks for the pound. Conversely, a beat of expectations could offer the pound some welcome relief, though data will likely remain secondary to any Brexit developments.

GBP/EUR is on track for ten weekly declines out of eleven, suffering a 6% depreciation. The currency pair hasn’t closed a week below €1.11 since August last year, but the slide is showing no sign of a retracement for now, which is unnerving GBP investors.

EUR/USD

Dollar dips on risk aversion

The US Dollar has started the day weaker, which has supported GBP/USD from moving below $1.24 again and allowed EUR/USD to pull north of $1.12. Risk aversion is sweeping over markets, pushing benchmark US yields to a 9-day low, weighing on dollar demand.

US Treasury yields have fallen amidst weaker US economic data and a growing concern over the prolonged US-China trade dispute. Safe-haven demand has picked up as a result, strengthening the Japanese Yen and Swiss Franc this morning. The US Dollar, which sometimes benefits from safe-haven appeal, has weakened as investors increase bets of a weaker dollar amidst expectations of interest rate cuts by the US Federal Reserve. The first rate cut in a decade is due at the end of the month, but the dollar continues to weaken as the probability of a 50-basis-point cut has risen from 20% last week, to 36% this morning (source: CME Group).

EUR/USD is looking to break above some key moving averages located at $1.1244 and $1.1249. Should dollar selling continue and allow EUR/USD to climb higher, a re-test of $1.13 could be on the cards today.


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