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Currency Market Analysis

Jul 27, 2020 | Currency Market Analysis

Global Themes

  • GBP/USD up nearly 2% from last week
  • US Fed and growth figures
  • Euro strong ahead of GDP data
  • Attention on corporate earnings

GBP

GBP/USD up nearly 2% from last week

Sterling scored its best week against the US Dollar since early June last week, rising 1.8%. The climb was mainly down to the plethora of factors hurting the US Dollar rather than sterling strengthening. Will more bad news this week keep GBP/USD elevated?

The US Dollar was viewed as a safe haven at the start of the pandemic due to its liquidity appeal, but since the unprecedented monetary and fiscal support by central banks globally, financial markets have stabilised. In a world of abundant liquidity, it seems the dollar has lost its safe haven status so amid escalating geopolitical tensions and rising coronavirus cases, the dollar has weakened. The US Dollar index has fallen to 22-month lows, weighed down heavily by the 4-cent rise in EUR/USD in two weeks.

  • Should the dollar-weak trend continue, GBP/USD may look to test the 200-week moving average, which currently resides at $1.2905. The possibility of a reset towards $1.25 next month cannot be ruled out though.

US Fed and growth figures

One of the main events this week will be the US Federal Reserve’s (Fed) policy meeting which concludes on Wednesday. No changes to interest rates are expected, though investors are expecting guidance on further stimulus measures to help support the world’s largest economy through the pandemic.

The Fed has already slashed interest rates to near zero and vowed to buy an unlimited amount of government debt as well as unveiling other emergency support measures, which have helped stabilise markets and offered confidence to investors. US stocks have surged 45% since March as a result but there are lingering concerns about the sustainability of the recovery. What else does the Fed have in its toolbox? In addition, market participants will be examining the flash second-quarter US GDP data released this Thursday. The consensus points to a 34% annualised contraction, which would be the biggest fall since the second world war.

  • Meanwhile, today, Republicans are set to reveal their proposals for a new round of stimulus, including $1,200 per person in direct cash payments. The package as a whole is expected to consist of $1trn worth of support.

Euro strong ahead of GDP data

Second-quarter GDP data from across Europe will be released over Thursday and Friday. Big slumps are expected in France, Spain, Italy and Germany as well as the Eurozone as a whole. Nevertheless, the Euro may remain strong given the historic EU rescue package agreed last week.

The proposal for the package triggered EUR/USD to break above $1.10 in late May and following the agreement of the €750bn fund, EUR/USD has enjoyed upside momentum. The currency pair is on track for its best month in over four years, currently up 4% month-to-date, scoring five successive weekly gains. The stronger Euro has pressured GBP/EUR under €1.10, though the depreciation of the pound against the common currency has been modest compared to that of the dollar.

  • As it is the final few days of the month this week, month-end flows may fuel some erratic price action in currency markets. Given the parabolic rise of the Euro, traders may look to take some profit off the table, which could send EUR/USD lower at the end of the week.

Attention on corporate earnings

Market participants are also keeping a close eye on what is expected to be the weakest corporate earnings season since the global financial crisis. Some of the biggest names in the tech sector are on the agenda this week, with Apple, Amazon and Alphabet reporting on Thursday.

Four of the big UK banks report this week and investors will also pay close attention to their outlook for the rest of the year. Hopes for a rapid V-shaped recovery in earnings have been one of the main reasons why the overall market has bounced back so quickly from its March lows. This has translated into elevated risk appetite in currency markets too, benefiting risk-sensitive currencies like AUD, NZD, GBP, NOK to name a few.

  • Should the earnings season be a bigger disappointment than forecast, then riskier currencies may suffer and demand for safe-haven assets may gain traction.


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