Currency Market Analysis

Nov 29, 2019 | Currency Market Analysis

Global Themes

GBP

Although there is a growing expectation of a Conservative Party majority in the UK general election next month, we shouldn’t confidently assume this means a long-term sterling recovery. That said, the pound has consolidated at higher levels since soaring in October, largely on the anticipation of a Tory victory and a Brexit breakthrough. However, upside potential from here remains unclear given the uncertainty of the transition period and UK economic health in 2020.

The pound has enjoyed an upbeat start to the last quarter of the year on hopes of a Brexit breakthrough and an end to short-term uncertainty. Both GBP/USD and GBP/EUR are up over 5% over the last two months and continue to hold onto most of those gains. Forecasts for sterling to rise on a Conservative majority suggest GBP/USD could challenge new year highs above $1.34 and GBP/EUR above €1.18, perhaps on towards €1.20. An uplift in sterling demand, witnessed after a major poll revealed a 68-seat strong majority, saw GBP/EUR reach close to 7-month highs yesterday. But with two weeks still to go and a particularly volatile electorate, investors remain cautious. An important point to consider for the future is whether any further sterling gains will hold into next year.

  • The UK still faces uncertainty surrounding the time-sensitive UK-EU trade agreement, currently required to be achieved before the end of the transition period in Dec 2020. Moreover, slowing growth and potential interest rate cuts by the Bank of England will dampen GBP demand. With this in mind, demand for 'put' options (to sell the pound in the future) are now outweighing demand for 'call' options (to buy sterling).

CDN

With most traders still on holiday for Thanksgiving across the pond, focus shifts to Canada’s third quarter GDP results which drop in at 1:30pm today. GBP/CAD continues to test a key resistance level around C$1.72, near 7-month highs.

The consensus forecast is to see Canada’s Q3 GDP rise 1.2% y/y; a far cry slower than the 3.7% rise in the second quarter. The Bank of Canada holds its final monetary policy meeting of the year next month and this important data release may impact the tone and any signals by the Canadian central bank with regards to interest rate guidance in 2020. Currently money markets price around a 40% chance of a cut in the first quarter of next year and if this probability shifts higher or lower following today’s GDP data, we could see the CAD weaken or strengthen accordingly.

  • Up 2.5% since this time last month, GBP/CAD remains in an upward trend channel with support around the C$1.7070 zone likely to be a tough nut to crack.

EUR

It’s a relatively busy day of data amid a likely less liquid FX market due to Thanksgiving and Black Friday. It being month-end may also spark some punchy, seemingly random, moves in the market as portfolio managers rebalance their portfolios in a holiday thinned market environment.

 Less liquidity in the FX market combined with a raft of important data and potential  political developments, enhances the risk of large and erratic price swings. Today, Eurozone Harmonised Index of Consumer Prices (HICP) will be released at 10:00am. In the Eurozone, the HICP is an indicator of inflation and price stability for the European Central Bank (ECB), and an increase is expected in both core and headline of 1.3% and 0.9% y/y respectively. Though this could support the Euro from further downside risk, the figures are still well below the ECB’s target level of near to but below 2%. German HICP yesterday did rise slightly in November but marked seven straight months below the ECB’s target.

EUR/USD continues to hover around $1.10 whilst GBP/EUR is looking to clinch its highest weekly close since early May.


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