There was a slightly more cautious approach to trade yesterday versus the action we saw on Monday, and while Monday saw stocks press fresh record highs and major currency pairs in tight ranges, yesterday saw a little more caution in stocks but some breakout potential in some currency pairs, most notably GBP. The pound was on the back foot for much of the day following Carney’s comments at the Mansion House breakfast yesterday and the slide has continue this morning. Falling oil prices had a lot to do with yesterday’s caution that fed through to energy related stocks and dragged larger benchmarks lower in Europe and the US. The USD index rallied to fresh 1 month highs, demand for the greenback continuing to grow along with expectations the US will see at least one more interest rate hike this year. Overnight sentiment remained cautious, the Nikkei was lower while USDJPY was also lower as the yen benefited from some risk aversion.
There was a number of Fed speakers across the wires yesterday and we highlighted that should their rhetoric continue to support additional rate hikes in 2017, then there would be scope for the USD to trade higher. Kaplan suggested US GDP would hit 2% this year and that is more than enough to remove much of the remaining slack out of the labour market, and while inflation has been slightly sluggish, it’s not necessarily bad. Much of the talk after rate hikes are off the table will be on balance sheet reduction, and suggestion are this will start this year and could continue out past 2020. Data in the US remains light today and with that broader risk sentiment looks set to dominate currency movements.
There is some data from the UK today and it will be interesting to see what the BOE’s Haldane has to say later, especially after last week’s BOE voting and Carney’s slap back for the pound suggesting now is certainly not the time to raise rates. The UK remains in the spotlight on the political front and this is also putting GBP under some pressure. Not only are Brexit talks ongoing, but news suggesting the Tories and DUP are not quite making the headway they had hoped puts their coalition at risk. PM May has been facing considerable backlash after losing majority in an unnecessary election, as well as her response to domestic matters in the UK. Her biggest test most likely will be today’s Queen’s speech, where the Queen will set out the British governments legislative agenda in her opening of parliament. While the occasion is as much about pomp and ceremony as anything else, should PM May fail to gain support from the house, her cards may well by truly marked.
GBPUSD has broken through support at 1.2660 and again at 1.2635 and now trades back below 1.2600, with next support not in sight until 1.2515 area. That’s where I will be looking for a small bounce, but pressure is growing on GBP, while the USD appears to be gaining a foothold across the market.
EURUSD had a similar breakdown yesterday and cleared 1.1130 area, but has failed to continue lower, we need to see 1.1100 breakdown if EURUSD is to see acceleration lower with 1.1020 the next stop while moves higher remain capped around 1.1200.
EURGBP testing upside,.8862 represents major resistance and a break above there could spell further trouble with .9000 attracting above that.