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Currency Market Analysis

May 21, 2019 | Currency Market Analysis

Global Themes

  • Sterling falls to 4-month low
  • Fed minutes looms tomorrow
  • Dovish RBA minutes knock Aussie

GBP

Sterling falls to 4-month low

The British Pound is reacting to the rising risk of a no-deal Brexit unfolding. Prime Minister Theresa May is not expected to scrape her Brexit deal over the line in June and may be pressured out of leadership before the summer. After suffering its biggest weekly decline in over a year against the US Dollar, the pound remains on the backfoot, dipping under the $1.27 handle this morning.

GBP/USD has fallen ten out of eleven trading days, whilst the decline in GBP/EUR deepens for an eleventh day straight and touching a new 4-month low sub-€1.14. Brexit uncertainty and the risk of a new Prime Minister leading the UK towards a no-deal Brexit is a major concern for GBP traders. The widespread expectation that PM May’s Brexit deal will be rejected for a fourth time in early June is fuelling the selling pressure of the pound as the UK remains in a state of limbo in which business and consumer confidence wanes.

  • The European elections takes place from Thursday through to Sunday and Nigel Farage’s Brexit Party is forecast to gain the largest vote share in the UK, with the Conservatives trailing behind both Labour and the Liberal Democrats. The pressure on PM May to step down is intensifying and Sterling sentiment remains sour.

USD

Fed minutes looms tomorrow

Several US Federal Reserve (Fed) policymakers, including Fed Chair Jerome Powell, hit the wires yesterday, offering some insight into monetary policy guidance going forward. There were mixed views on whether to hike or cut interest rates, with Fed member James Bullard stating core PCE inflation is running at a worryingly low pace. The US Dollar softened slightly, allowing GBP/USD to hold its grip on the $1.27 handle, yet this key level has since given way this morning, and $1.2650 is the next downside target.

The dollar remains buoyant though, a favoured currency amidst rising trade and political tensions that dents risk appetite. Though Fed Chair Powell acknowledged the US-China trade war as a concern, it is still premature to judge the outlook on the economy. The dollar has benefited in times of increased global risk and uncertainty thanks to its safe-haven status and high-yield appeal. However, with rumours of a Fed rate cut emerging, the demand for the dollar may soon soften. The Fed left interest rates unchanged at its May 1 meeting, but markets are increasingly pricing in a cut this year. Consequently, the minutes of this meeting, released tomorrow evening, will be closely scrutinised and could inject volatility in dollar-denominated currency pairs.

  • EUR/USD has is approaching 2019 lows around $1.11 this morning. A break under this key support level could open the trap door to a new trading range of $1.07-$1.10. Should such an aggressive move occur, the knock-on effect could drag GBP/USD towards $1.25.

AUD

Dovish RBA minutes knock Aussie

Earlier this morning, the Reserve Bank of Australia (RBA) published the minutes of its May policy meeting. The minutes conveyed a bearish bias, with language leaning towards a rate cut at the meeting in June. The Aussie dollar has weakened having jumped higher over the weekend after the surprise election result.

Over the weekend, the AUD gapped higher against currency peers after the election win for the business-friendly centre-right Liberal National Coalition. However, the upside bias didn’t last long after the RBA Governor Philip Lowe warned that the policy board were considering a rate cut at its next meeting in June.

  • GBP/AUD initially fell to 1-month lows on Monday but has since recouped half of its losses and is stretching towards A$1.85 today.


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