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Currency Market Analysis

Nov 28, 2019 | Currency Market Analysis

Global Themes

EUR

The EUR/USD exchange rate broke below $1.10 yesterday for only the third day in the last six weeks. After an October rebound, likely helped by Brexit optimism boosting the Euro, November has seen the currency pair retreat as Euro selling pressure increases. Where next for the most traded currency pair in the world? A raft of European data will drop in at 10:00am and 1:00pm today.

Down 1.4% month-to-date, EUR/USD clocked a fifth daily decline out of six and is back trading below the 50, 100 and 200-day simple moving averages. This is often interpreted as a sign the downtrend is still intact, though as reported yesterday, traders expecting a large extension lower may be disappointed given the implied volatility curve, which reflects how much exchange rates are expected to change over different time periods, has fallen to record lows. The downside risk is increasing though, especially after upbeat US macro data yesterday.

Today, Eurozone sentiment indicators will be unveiled at 10:00am and expected to show a slight improvement in economic, industrial and services sentiment. Flash German inflation will also be released at 13:00, with focus on a potentially higher reading helping to support the common currency.

JPY

Risk sentiment remains tepid following US President Donald Trump’s signing of the Hong Kong Democracy Act, which threatens to complicate and potentially derail US-China trade talks. Safe-haven assets such as Gold, JPY and CHF are rising while risk-sensitive currencies like AUD are weakening.

China’s renminbi has also weakened across the board as investors worry relations between the world’s two-largest economies will become more fractured. The bill that Mr Trump has signed threatens sanctions if officials abuse human rights in Hong Kong. It is seen as backing the pro-democracy demonstrators and could exacerbate an already tense situation between not just Hong and China but the US and China. China's foreign ministry has already stated that China is opposed to the law and could threaten to take firm countermeasures.

The knock-on effects of the US-China trade war have already taken their toll, with global economic growth slowing, central banks cutting interest rates and safe-haven assets in high demand.

USD

It’s Thanksgiving in the US and traders will have packed up for the week across the pond. Holiday-induced thin liquidity means less traders in the market and potentially more erratic price moves over the next few days.

Trading sentiment remains cautious amidst ongoing uncertainty surrounding the US-China trade talks. FX markets have remained cautiously quiet, especially compared to stocks, which are on the climb. Oil has also soared circa 14% in just 39 trading days; whist other commodities are also rising in value. However, currency markets remain relatively calm with traders unwilling to bet big and exit risk-off positions as safe-haven currencies remain buoyant.

Will the next couple of days ignite some volatility given thinner market conditions and end of month flows?

GBP

Last night, the highly anticipated YouGov MRP poll revealed the Conservative Party is expected to win 359 seats compared to Labour’s 211 seat forecast. The news hoisted sterling around half-a-cent higher with GBP/USD testing the mid-$1.29 region and GBP/EUR recording fresh 6-month tops in the mid-€1.17 area.

The multi-level regression and post-stratification (MRP) poll is considered the mother of all polls because in 2017 it accurately predicted the hung parliament in the UK general election. It uses data from the preceding seven days from 100,000 panellists across the UK and takes into account a number of local political factors. Therefore, this model is expected to provide the best indication of the election outcome and is why sterling has strengthened on the prediction of a 68 strong Tory majority. However, the electorate is extremely volatile and if Labour’s recent recovery continues over the next two weeks, we could face a hung parliament. This scenario is expected to send the pound tumbling to and likely below $1.25 and €1.14 versus the US Dollar and Euro respectively.

In a hung parliament, the UK would suffer yet more political paralysis, turmoil and uncertainty. The Brexit process, driving sterling sentiment, will likely remain gridlocked with the January 31, 2020 deadline only around the corner.


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