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Currency Market Analysis

Jul 22, 2020 | Currency Market Analysis

Global Themes

  • EUR/USD hits 18-month high
  • Stocks and commodities fly high on risk rally
  • GBP/USD recoils from 19-week peak

GBP

EUR/USD hits 18-month high

Despite the Euro failing to originally jump on the news of the EU recovery fund being agreed, the common currency staged a late surge yesterday afternoon, which hoisted the most traded currency pair in the world – EUR/USD – to levels last traded in January 2019.

The agreed stimulus package is a clear sign of harmony amongst EU states amid the wave of Euroscepticism and Brexit that has haunted the bloc for years. EUR/USD rallied to $1.1547 in the early hours of this morning, a new 2020 high, with eyes on a run towards $1.1570 – the peak in January 2019. A close back below the $1.14 handle would undermine the bullish momentum but with five weeks of successive gains in the making, it looks like the Euro has the wind in its sails.

  • GBP/EUR has been pressured back towards the €1.10 handle due to the strength of the Euro, having enjoyed a spell above €1.11 earlier yesterday thanks to the risk-on rally. The 4-month downtrend remains firmly intact with €1.0760 a potential downside target for traders this summer.

Stocks and commodities fly high on risk rally

Equities surged higher yesterday, and oil prices reached a 4-month high. Iron ore hit new 2020 highs, copper and other base metals jumped and gold and silver exploded to near 9-and 7-year highs respectively as risk appetite went into overdrive.

The improved risk appetite was fuelled first by positive developments about a Covid-19 vaccine and was compounded by the EU’s historic deal on a substantial stimulus package to help repair Europe’s deepest recession since World War Two. Hope of further stimulus from the US is also encouraging market sentiment, which is why gold is rising due to its appeal as an inflation-hedge, which has helped boost the commodity-linked ZAR too. Other currencies linked to stocks and commodities appreciated such as the AUD, NZD, CAD, NOK, SEK and other petro currencies like the MXN and RUB. The risk-sensitive pound, which often follows equity markets these days also pounced on the weak USD.

  • This morning, the risk rally has eased slightly, but there is room for an extension so long as stimulus measures are followed through to help support economies through this pandemic. Though GBP/USD has pulled back from 4½ -month highs, GBP/AUD has also slipped to 10-month lows indicating widespread sterling weakness.

GBP/USD recoils from 19-week peak

The weaker US Dollar amid rising risk appetite allowed the pound to climb to new 19-week highs yesterday, just falling shy of the $1.28 handle. The currency pair is up 2.6% so far this month and has recovered 11.5% since its aggressive plunge in the height of the market turmoil in March. GBP/USD has already lost 0.5% today and is back below its 200-day moving average.

Out of the major currencies, the British Pound and the Canadian Dollar have underperformed against the US Dollar since the market began recovering in March. This may partly explain the sharp uplift in GBP/USD this week. Fundamentally though, the pound remains vulnerable to geopolitical tensions rising between the UK and China and the ongoing deadlock with the EU regarding a post-Brexit free trade agreement. Investors are also concerned about the widening budget deficit coupled with the huge current account deficit in the UK, which is expected to hinder substantial sterling gains. Nevertheless, the Bank of England’s chief economist, Andy Haldane, gave a bullish assessment of the UK economy’s recovery this week, suggesting a V-shaped recovery is still possible.

  • In the absence of any top-tier economic data today, focus remains on risk sentiment to drive markets ahead of important UK retail sales and global flash PMIs this Friday.


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