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Currency Market Analysis

Jul 03, 2020 | Currency Market Analysis

Global Themes

  • Risk still on as US closed
  • Key Brexit flashpoints
  • Will Sterling fall in July?


Risk still on as US closed

Independence Day falls on Saturday this year, meaning US financial markets are closed today. This may result in thinned conditions in the FX market and make for some choppy price action throughout the day. The US Dollar remains fragile as risk appetite swells.

The abundant liquidity thanks to the unprecedented monetary support by central banks has so far kept the overall FX tone positive with the US Dollar backpedalling as a result. The risk-on market environment was supported by a strong US jobs report yesterday, fuelling hopes that the world’s largest economy is on the road to recovery. The US economy created 4.8mn jobs in June dropping the unemployment rate to 11.1%, both figures better median forecasts.

  • Stock markets continued to cheer the upbeat economic data and increasing hopes of a potential Covid-19 vaccine. The benchmark S&P 500 index has risen nearly 5% this week, whilst the dollar has depreciated circa 1% across the board – indicating risk on leads to dollar off.

Key Brexit flashpoints

After four days of intensified Brexit talks, Michel Barnier, the EU’s chief Brexit negotiator, warned that serious divergences remain between the UK and EU. Both sides have expressed the need to ramp up talks though in order to avoid a potential no-trade deal scenario once the transition period expires at the end of this year.

The new timeline that both sides are working hard to stick to include brokering a deal by the end of summer, with UK PM Boris Johnson hoping to secure one by the end of the month or possibly August. The EU have stressed a deal needs to be agreed by October if it is to be ratified in time. The main flashpoints in the negotiations include the level playing field, fisheries, and the European Court of Justice. Though the tone is leaning to the optimistic side, significant differences on the important flashpoints still remain. If a large free trade deal is agreed and ratified before the start of 2021, GBP/USD could soar back above $1.30 and towards $1.40, whist GBP/EUR could challenge the €1.20 handle.

  • Alternatively, if a bare bones trade deal is agreed, or worse, no trade deal is agreed, then sterling is expected to weaken sharply. GBP/USD could fall beyond the $1.14 mark recorded in March and GBP/EUR may trade as low as parity.

Will Sterling fall in July?

History suggests the pound usually weakens against the US Dollar in July but FX traders should keep a close eye on market fundamentals and the emerging technical picture, which will dominate GBP/USD this month. A study of GBP/USD's performance for each July since 2000 shows it has fallen in 10 of the last 20 years, or 50% of the time.

Seasonality should not be considered in isolation, but it's a useful tool when combined with other factors. Sterling has climbed above $1.25 against the dollar this week, having been as low as $1.2250. This GBP strength has also allowed GBP/EUR to stretch towards the key €1.11 handle which if closed above today could signal more upside momentum next week. As per the seasonality study though, if GBP/USD usually weakens in July, then any uplift in the pound this month may be short-lived. This is especially the case considering August is usually even more disappointing for GBP/USD, depreciating 70% of the time over the past 20 years.

  • Sterling demand may be losing steam given the upper shadow on the daily chart suggesting more GBP sellers are entering the market at these levels. Nevertheless, a weekly view of GBP/USD indicates a run to $1.26 cannot be ruled out in the short-term.

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