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Currency Market Analysis

Jul 24, 2020 | Currency Market Analysis

Global Themes

  • Mounting risks weigh on USD
  • UK retail sales beat forecasts
  • Flash PMI Friday
  • Brexit uncertainty persists


Mounting risks weigh on USD

Since financial markets spiralled in March as a result of the escalating coronavirus crisis, the US Dollar has been a hot topic of discussion. It has endured a turbulent journey against many peers as investors sought out liquidity before dumping the lower yielding currency and risks are beginning to mount for the dollar.

The US Federal Reserve slashed interest rates to near zero, eliminating the dollar’s yield appeal. The health crisis in the US is worsening as Covid-19 cases continue to increase and geopolitical tensions are also on the rise as US-China relations sour. The US presidential election in November is another looming risk event and investors have already begun to position for the possibility of an end to the presidency of Donald Trump. The US is simply facing more risks than other developed nations but also its attraction as a highly liquid currency is less meaningful in a world flooded with liquidity by central banks.

  • The US Dollar index, which measures the dollar’s value against a basket of currencies, is set to record five straight weekly losses, which would be its longest weekly losing streak since late 2017. This morning, the index has fallen to nearly fresh 2-year lows, weighed down by the huge rise in EUR/USD.

UK retail sales beat forecasts

Early this morning, UK retail sales data was released and the 13.9% m/m jump in June smashed the 8% forecast. In May, retails sales jumped 12%, which means the two monthly increases in the volume of retail sales have brought total sales to near pre-pandemic levels.

Non-essential stores opened up again in June having been in lockdown to combat the spread of coronavirus. As a result, non-food and fuel stores saw a sharp recovery from the March and April slump. Although sales at a total level have recovered, not all sectors have experienced the positive uplift. Non-food stores was one of the hardest hit sectors and sales have not returned to pre-lockdown levels with textiles, clothing and footwear experiencing the sharpest decline. Household goods stores is the only store type to show an increase since the start of the pandemic, with sales in electrical appliances and paint a popular choice for consumers.

  • The pound has reacted positively to the data this morning, albeit modestly. Focus now turns to the flash PMI figures, which will be released at 9:30 this morning.

Flash PMI Friday

Today, flash PMI figures from the Eurozone, UK and US will be released at 9:00, 9:30 and 14:45 respectively. All regions are expected to see all sectors bounced back into positive territory this month, though it is questionable whether the data will influence FX markets.

It is argued that the PMI data is unclear in what it is measuring or how it should be interpreted. The 50 level separates contraction from expansion so a recovery above 50 broadly brings us back to pre-pandemic levels, but activity is unlikely to have reached pre-pandemic levels in June. For this reason, the reaction in currency markets may be fairly muted to today’s PMI data.

  • Currency moves are more likely to be determined by moves in general risk perceptions and the perceived risk characteristics of each currency rather than relative economic performance.

Brexit uncertainty persists

Sterling currency pairs, excluding the US Dollar, retreated yesterday because of the ongoing uncertainty about UK-EU trade talks and rising fears about a no-trade deal scenario by year-end. GBP/EUR remains under pressure but is battling to stay afloat the €1.0990 mark to avoid a significant downturn.

Fears regarding Brexit are growing amid the pessimistic tones surfacing from London and Brussels. EU negotiators feel that the UK is avoiding engaging on the big issues, which is keeping the talks in deadlock. Meanwhile, hopes of a trade deal between the UK and US this year have almost been abandoned because of the US election this November. Of course, coronavirus is likely consuming most of the resources and energy in the EU and US, so trade deals with the UK may not be getting the attention the UK hopes for. As it stands, the pound remains resilient with GBP/USD climbing further north of $1.27 today, though GBP/EUR remains sub-€1.10.

  • If a no-trade deal Brexit does play out and a UK-US trade deal isn’t in place either, then sterling is expected to fall quickly back to levels witnessed in the height of the coronavirus crisis in March.

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