It’s been an interesting couple of weeks in currency markets and several major pairs are at long time/key high levels and it’s not all one way traffic. EURCHF continues its grind, pressing above 1.1900 this morning, the first time we’ve been at these levels since the SNB removed the EURCHF floor Jan 12th 2015. EURSEK is also approaching key levels, we saw highs just below 10.5000 on Friday and while there was a slight pull back lower yesterday the pair has stated higher once more this morning, these levels represent the highest levels since December 2009. EURUSD is also trading firmer, although not quite at recent highs above 1.2500, this has pressed back above 1.2400 this morning and will be looking at some resistance into 1.2435/40 area.
For the ECB these levels will be somewhat concerning, especially given the tone of the last ECB meeting where the strong euro was enough to give cause for some concerns due to its impact on lagging inflation. The big question will be, will the ECB allow the euro’s strength to continue without some comment? Its surprising as yesterday comments from the ECB’s Praet failed to start a broader euro slide, when he suggested that ample ECB monetary policy stimulus remains necessary. The German ZEW survey highlights the best of the Eurozone data, although sentiment is due to decline and this could cause some short term euro weakness, although will unlikely cause any shift in the ECB’s decision making process, this have little long term impact.
The pound is one of the few currencies out there that is eclipsing the single currency. GBPUSD has retraced all major levels of the Brexit vote day sell off. 1.4325 represented that level and the spike back above there pulls us to levels last seen on the day after the vote where the selloff saw us drop as low as 1.1800 officially, several references trade far lower than that on the flash crash but 1.1800 has been marked as the low, while 1.1985 is the normal market conditions low. 1.4430/35 area now offers the next best level of resistance to the move higher and with some key data from the UK today, it could be make or break for the pound. It’s not just the USD that has been under pressure from the pound, EURGBP continues to drop as sterling strength overrides the broadly stronger euro, the pair now sits just above support around .8630 and major support below towards .8500 area is not ruled out should UK data support this morning.
The focus this morning will be on UK labour market data, and while unemployment is expected to remain at 4.3%, the key figure for sterling watchers will be the expected 3% wage growth, which will bring real UK wage growth back into positive territory and support the heavy bias for a BOE rate hike next month. Needless to say, should wage growth disappoint then GBP pairs will almost certainly face some selling and while markets are pricing in over 85% chance of a BOE rate hike next month, I’d remain sceptical and still feel that is the biggest risk to GBP in the coming months.
The USD has been in steady decline since the weak payrolls figure at the start of the month, the USD index now down over 1.5% in that time. The Fed’s Kaplan failed to start any revival for the greenback yesterday when he suggested that three rates hikes in 2018 and again in 2019 seems likely/appropriate. There is a host of speakers from the US today which will likely take a little more attention away from the data points we are expecting to see. There’s also the continued geopolitical storm that’s brewing, the Trump/Syria/UK/France/Russia continues to take plenty of headlines and papers are happy to sell fear about Russian reprisals. Trump was also active yesterday, calling on Russia and China to stop “devaluing their currencies” while the US continues to raise interest rates. Although it’s probably worth pointing out that the USD index has dropped over 15% since the US started raising rates in December 2016.