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Currency Market Analysis

Jul 28, 2020 | Currency Market Analysis

Global Themes

  • GBP/USD eyes $1.29 barrier
  • The dollar’s demise
  • Gold’s parabolic rise

GBP

GBP/USD eyes $1.29 barrier

Sterling has capitalised on the weaker US Dollar and is on track for its best month since October last year. GBP/USD is up 3.7% month-to-date, falling just shy of the 200-week moving average yesterday, located at $1.2905. This is likely to be a tough resistance level to overcome for sterling bulls.

The ascent of the currency pair can be largely attributed to the weakness of the US Dollar as a result of a predominantly risk-positive market environment. The currency pair has dropped over 13% in 10 trading days in the height of the market turmoil in March but has recouped 12.8% over the past four months. GBP/USD finally broke comfortably above the 200-day moving average at $1.27 last week and climbed two cents in four days thereafter. Back in October 2019, when the currency pair last convincingly shifted above the 200-day moving average, a subsequent climb to $1.35 over two months evolved.

  • Given the lack of positive-sterling fundamentals to help support GBP/USD beyond the likely critical barrier of $1.30, it seems doubtful this pattern will play out again. Meanwhile, GBP/EUR remains anchored below €1.10 due to the stronger Euro. At time of writing, this currency pair is 0.6% lower in July and over 7% lower year-to-date.

The dollar’s demise

The US Dollar continues to weaken amid growing concerns about the damage to the US economy caused by the ongoing coronavirus crisis. The rate of new cases in the US is showing no signs of slowing down and is expected to limit the speed of the economic recovery. In risk-on or risk-off market conditions, the dollar has not been favoured by investors.

The liquidity appeal of the dollar is no longer a strong case for investors to buy the US currency considering the extraordinary stimulus measures by central banks and governments globally. Even when markets turn risk averse, the dollar has weakened considerably against traditional safe-haven currencies like the JPY and CHF. Conversely, when risk appetite has picked up, demand for higher yielding assets has also left the dollar in the doldrums. Faith in a global economic recovery has been the main catalyst for a weaker dollar, with EUR/USD shooting to near 22-month highs following the agreement of an EU rescue package to help support the European economic recovery. The dollar index is on track for its worst month in nearly a decade.

  • Investors await the announcement of a large US fiscal package yet to be agreed by the Republicans and Democrats and for the US Federal Reserve’s (Fed) monetary policy review tomorrow evening.

Gold’s parabolic rise

Except for the “dash for cash” period of this pandemic, where investors sold everything and anything (including gold) for the liquid US Dollar, the precious metal has been in high demand and hurtled to record peaks earlier this morning.

Given USD liquidity is at a multi-year high, investors continue to search for yield, which is why equities have rallied so hard over recent months. Usually, gold is seen as a safe-haven asset, which appreciates in times of heightened uncertainty and risk aversion. However, even in times of increased risk appetite, the precious metal has strengthened. Gold has staged a meteoric rise, up over $125 in little more than a week as the negative correlation with the US Dollar persists. Since the Fed slashed interest rates in the US to near zero, gold has climbed higher.

  • Buying gold is also hailed as a hedge against inflation and seeing as the Fed also appears willing to let inflation breach its 2% target in the future, demand for the precious metal is likely to persist.


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