The threat of war is usually enough to drive some safe haven demand in markets and the reaction to Trump’s response to North Korean threats saw just that. The US President’s vow to send “fire and fury” if North Korea continues to make threats was enough to knock US indices back from record highs. Tensions escalated overnight with North Korean threats to Guam, a US territory in the pacific. The result was a show of force from the US with “test” flights launched by US bombers from their Guam base in unison with the Japanese and South Korean air force. This is certainly a major escalation and what markets are heavily focused on for now, with all major global indices facing selling in the last 18 hours. The selling has been controlled however, major global indices down between .75% and 1% from yesterday high prints, while the JPY finds itself in demand across currencies as a traditional safe haven, with gold also up approx. 1.4% from yesterday’s lows. The USD was outperforming yesterday but has since pulled back slightly, however gains for the greenback have held against both GBP and EUR, down 2.3% and 1.4% from their respective August highs last week.
Aside from the larger geopolitical events and some central bank speak, FX markets have had little to grab hold of this week. The euro was unfazed by weaker German trade data yesterday, selling in the euro only really getting going well into the US session as USD demand took hold and dropped EURUSD below 1.1726 support. We are trading just above there for now but should that give way today, there is little in the way of support until we get down to 1.1650 area. 1.1768 hold rallies higher for now, with 1.1817 offering firmer resistance above. EURGBP is pressing downside as well having traded to fresh 10 months highs .9088, although the slide in Euro across the board now sees EURGBP sitting at .9016, a break below .9000 area will target back towards .8920.
GBP has been under pressure from some weaker data and a dovish BOE outlook, but the BOE are very unlikely to come out sounding positive while the uncertainty of Brexit talks hangs over the UK, that’s the simple truth of the matter and until then we are unlikely to see any real hawkish rhetoric to give GBP the recovery it really needs. Today’s calendar is void of data but industrial and manufacturing production figures due tomorrow, along with Trade Balance data and the NIESR GDP estimate. Any signs of resilience in the UK economy will lend some relief to GBP, although we’d likely favour recovery vs the Euro than USD in the shorter term. GBPUSD supported around 1.2952 while resistance should hold with sellers lined up just above 1.3055.