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Currency Market Analysis

Sep 04, 2020 | Currency Market Analysis

Global Themes

EUR

The big event today is the US labour market report at 13:30, which may rock financial markets ahead of the weekend. An extra 1.4mn jobs are expected to have been added in August, although it is difficult to assess how the USD will react to a strong or weak payrolls number.

The inverse correlation with equity markets of late means that even if the jobs report is positive and pushes US yields higher. The dollar may not appreciate because equities are expected to climb in such circumstances. Knee-jerk reactions might be dollar positive in an upside surprise, but subsequently the USD might actually perform better if equities tumble. Most labour market indicators suggest the recovery will continue in August with unemployment also expected to fall to 9.7% and such data may help improve risk appetite amidst rising optimism of a global economic recovery.

  • EUR/USD spiked to over 2-year highs earlier this week but reversed from the key $1.20 mark. The world’s most traded currency pair remains in an uptrend though, recently supported by the $1.18 mark.
Eurozone retail sales fell in July for the first time in three months. The bad news indicates that the recent rebound in consumer spending has potentially run out of steam, scuppering hopes of a sustained recovery in the region. European countries have largely been praised for their handling of the crisis, particularly the agreement of the EU’s historic recovery fund, which supported the Euro.

The €750bn stimulus package was agreed by EU leaders a few months back and the Euro has since charged higher against multiple currencies, especially the US Dollar. France confirmed it will implement a €100bn stimulus package yesterday using some of the money from this fund, which helped buoy French stocks. However, the overall sentiment towards the Euro weakened following comments this week by European Central Bank policymakers about the Euro’s recent rally and its potentially negative impact on recovery prospects. GBP/EUR jumped to 12-week highs nearer €1.13, but Brexit pessimism and overall risk aversion has dragged sterling lower across the board.

  • The Eurozone retail sales data also showed signs of a widening north-south divide in the pace of economic recovery. German, French and Dutch retail sales remain above last year’s levels, but the Spanish, Portuguese and Greek figures are stuck in negative territory.

As well as sweeping risk aversion hurting the pound and dovish comments from Bank of England policymakers this week regarding the UK’s economic outlook, Brexit negotiations have also weighed on sterling over recent days, with hopes of a UK-EU trade deal fading.

The Times reported that senior officials in PM Boris Johnson's office see a 30%-40% chance that a trade agreement with the EU will be made due to an impasse over state aid rules. This comes a day after the EU’s chief negotiator Michel Barnier once again took aim at the lack of flexibility of UK negotiators and warned the risk of a no-trade deal scenario was rising. Sterling has been taken on a wild ride since the UK voted to leave the EU in 2016, and GBP/USD has dipped under $1.20 multiple times on rising fears of a no-trade deal. Should this outcome unfold, expect the pound to tumble back towards the low levels witnessed in the height of the market turmoil in March.

  • GBP/EUR could slip back towards the €1.05 mark – a 12-year low, whilst GBP/USD may test the $1.14 handle again - a 35-year low. UK-EU trade talks resume next week, and sterling volatility may increase as a result.

GBP

The extraordinary monetary and fiscal stimulus during this pandemic has engineered a dramatic recovery in stocks and overall risk appetite since March. But given the divergence between this market optimism and the health of the real economy, a correction was always looming, particularly amidst fears of a second wave of infections as the colder months draw nearer.

Technology stocks have led the charge higher, with US equities climbing to record highs this summer, but the Nasdaq Composite Index fell nearly 5% yesterday with Apple Inc falling 8% and wiping more than $150bn from its value. The S&P 500 dropped 3.5% and the Dow Jones Industrial Average fell almost 3%. European indices also suffered, and volatility indices jumped to multi-month highs. The US Dollar benefited from the risk-off play, as did the traditional safe haven Japanese Yen and Swiss Franc.

GBP/USD has been positively correlated with US stocks over recent months, so the decline in US shares saw GBP/USD also slide. The currency pair notched new year highs near $1.35 this week but has since fallen over 1.5%, with downside risks mounting.


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