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Currency Market Analysis

Sep 02, 2020 | Currency Market Analysis

Global Themes

EUR

Yesterday, Eurozone flash inflation for August was released and not only did the headline rate dip back below zero but the core inflation rate fell to an all-time low. This may pressure the European Central Bank (ECB) to provide more stimulus given the deflationary nature of the coronavirus crisis.

The ECB’s monetary policy meeting next week is probably too soon for the central bank to make any significant policy changes, but we may hear a reiteration that it will use all of its tools available to try and appease investors. A potential increase in its Pandemic Emergency Purchase Programme was expected before year-end but given the weak inflation conditions, this may be brought forward to the September or more likely October policy meeting. The negative price trend coupled with the recent rapid appreciation of the common currency is certainly leading to speculation of more bond purchases and the Euro weakened as a result yesterday.

GBP/EUR capitalized and climbed to a 3-month high in the mid-€1.12 region. The currency pair is on track for its third successive weekly gain and may soon look to challenge its key simple moving averages located closer to the €1.14 handle.

GBP

Sterling has recoiled from its 9-month high against the US Dollar as traders took profit on the rapid rise of the currency pair. GBP/USD fell just short of the $1.35 mark yesterday, which was expected to be a strong resistance zone and has consequently slipped back into $1.33 territory today.

In the absence of any top-tier economic data today, Bank of England (BOE) Governor Andrew Bailey and fellow policymakers will address the UK Treasury Select Committee from 14:00 until 16:30 this afternoon. After the Fed revealed its new monetary policy strategy last week, the dollar came under aggressive selling pressure - will the BOE hint at expanding its bond-buying programme and how might that impact the pound? GBP/USD has already weakened nearly 1 ½ cents from the 9-month high printed yesterday, and the pair could easily fall to $1.31 in the short term whilst still maintaining an upside bias.

Meanwhile, UK-EU trade talks remain deadlocked, though investors hope more progress will be made when negotiations restart next week. Sterling volatility may ramp up as a result.

USD

The prime driver of the world’s most traded currency pair climbing higher stems from excessive US Dollar weakest due to the negative USD real yield. Lower interest rates for longer are expected in the US and EUR/USD yesterday extended above $1.20 for the first time since May 2018 as a result.

EUR/USD has climbed for four months in a row and is over 12% higher from the near 3-year low that traded in March. The currency pair quickly reversed course after breaking through the $1.20 barrier though and further upside from here may be limited. At present, bets on EURUSD rising are now bigger than any other EUR/USD gamble in history, which opens the door to a big correction lower. Historically, every other similarly sized bet has resulted in a meaningful correction, with some calling for a return to $1.14 before the long-term uptrend resumes.

The currency pair has already reset back below the $1.19 handle this morning after significant profit-taking around the $1.20 mark.


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