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Currency Market Analysis

Aug 28, 2020 | Currency Market Analysis

Global Themes

GBP

GBP/EUR looks poised to test the €1.12 handle again today after brushing it yesterday and printing a new 10-week high. The currency pair is on track for its best weekly performance in four and may extend gains if it closes the week out above €1.12. One of the main reasons for this uplift is related to market positioning. Speculative positioning on the Euro shows that traders hold a near record high amount of “long EUR” positions, which essentially means more traders are betting on the Euro rising in the future as opposed to falling. However, this stretched positioning lends itself to a greater risk of a correction, i.e. indicates that the Euro may be in overbought territory and subsequent selling of the common currency may prevail. Sterling is not out of the woods though, a combination of Brexit uncertainty, coronavirus and the terrible data released this week could still send the Pound retreating if, the dollar finds some way to recover. 

USD

It was a hugely volatile session on Thursday thanks mostly to the FEDs policy change on Inflation. Jerome Powell announced that they have agreed on “average inflation targeting” meaning that they will allow inflation to run hotter for longer, above their 2% goal. This will be allowed if they have spent substantial periods of time below it i.e. taking an average.

The announcement suggests that interest rates will remain lower for longer and the FED will be less inclines to hike rates when the economy starts improving. The dollar weakened heavily off the back of the news to fresh lows before reversing almost fully. This morning it once again starts on the back foot and GBPUSD is close to its 2020 high.

CAD

With global risk sentiment improving and stability in oil prices, the Canadian dollar has performed well this week. With the Federal reserve’s announcement, it will now be interesting to see how the BoC handle their policy review. Today we see Q2 GBP data which will be a real indication of how badly COVID hit the Canadian economy.

JPY

Japanese Prime Minister Shinzo Abe will resign for health reasons later today, ending his run as the country’s longest serving premier. Japan’s Topix index sold off by as much as 1.6% but the yen rose against several peers in the wake of the news. Due to the improved risk appetite across financial markets because of the extraordinary stimulus measures put in place by central banks and governments around the world, demand for safe haven assets like the JPY has waned. The yen has suffered significantly since the height of the market turmoil and GBP/JPY is trading over 13% higher compared to its low near ¥124.0 in March and has this morning recorded a new 6-month high near ¥140.0. The news of Abe’s resignation has surprised financial markets, though JPY hasn’t yet significantly rebounded as a result of haven flows. However, increased nervousness about the political uncertainty may spark more demand for the yen in the near future.


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