Another whipsaw day across markets and this time GBP was on the roller-coaster. GBPUSD rallied to highs just below 1.2700 and levels not seen since the October 5th flash crash before plummeting back towards 1.2550. EURGBP plummeted from .8486, in tandem with GBPUSD rise as sterling demand and a fragile Euro ahead of an Italian vote drove the pair back below .8400 (as low as .8375). The USD found itself facing some selling despite some better than expected data which saw US manufacturing beat expectations. Risk sentiment was not so positive however, in Europe stocks traded lower ending a two day rally and falling back from 8 week highs, selling was broad based and this sentiment carried into the US session where tech stocks saw the NASDAQ plummet, pulling the S&P lower as well while the Dow managed to once again press record highs. The Asian session saw markets find a little more support, a weaker Yen has been favorable for the Nikkei thus far this week but a light rebound in JPY strength saw a selloff as markets now thread the risk line carefully ahead of today’s non-farm payrolls from the US, as well as the Italian referendum this weekend.
In terms of Italy, what we are really seeing is a vote of confidence for the current administration under PM Renzi (Yes), and the “anti EU” Five Star Movement headed by former clown/comedian Beppe Grillo. Renzi has already stated that he will resign should the note win and as we currently stand the polls and the Euro are positioned for another antiestablishment win. EURGBP has dropped over 10.5% from the October flash crash highs, while EURUSD is some 6% off it post trump elections highs. The dominant theme of Euro selling over the last few weeks would suggest that an upside shock for the Euro is more likely on a Yes vote, while there will likely be downside, albeit limited should the “no” vote dominate. Looking at EURUSD, we have seen a bounce from the 1.0520 area, that area has now provided support on three separate occasions and in fact acted has acted as a launch pad for larger bounces highs. We will need to see a break back below this level should EURUSD look to continue lower, failure to do so favors a move back towards 1.0850 area. The ECB will also be in focus next week so expect the single currency to remain volatile.
GBP made plenty of headway through yesterday and we saw EURGBP drop to below our target of .8430, EURGBP sell stops trigger below saw a drop to .8375 area but we quickly bounced back above .8430 and once again the 200 day EMA at .8434 acts as support for the pair. Similar to EURUSD we’ve seen this pair come a long way lower and while the ECB and a No vote in the Italian elections may press the pair back towards .8300, a larger risk is four a rebound higher especially given weak euro positioning and the volatility of GBP around anything Brexit related. Eurozone PPI headlines the calendar today but in terms of ranges .8434 and .8375 to the downside provide support, while rallies towards .8486 intraday will find some Euro sellers, although .8570 to .8600 is where the bulk of EURGBP sellers are lined up.
The USD continues to hold towards the top of its recent ranges and the greenback is certainly the most dominant of the major currencies since Donald Trump’s election. Rate hikes are priced for December and beyond and todays focus is on the Labour market report with 180k jobs expected to be added to the economy. Given Wednesday stringer ADP employment report, markets are likely looking for slightly stronger figures and we can expect a selloff in USD should we get any ready below 155k. In reality, all the hype that follows this release generally results in a quick whipsaw of range extremes in USD pairs, before once again settling back down as we were. Several Fed speakers will likely be more important to the USD as they take to the stands post NFP, with Governor Brainard speaking in Washington and Tarullo speaking at a financial stability conference. Any clues to next year rate hike path will be keenly sought.