Market News & Insights
10 October 2018

Politics Trumps Data in the FX World

We’re hearing all the right sounds about Brexit these days and the pound has rallied some 2% in the last week alone, almost 3% versus the euro. As my colleague highlighted yesterday, nothing has changed aside from the tone of the rhetoric and the EU are now making the positive noises, saying they feel they’re really offering the UK something special. Only time will tell but I’m almost certain this is not the end of GBP weakness and a new dawn for sterling strength. The Brexit negotiation process has seen regular bouts of positive and negative news flow, this cycle is no different. Those sitting on GBP exposures have been taking advantage of this recent move, it certainly provides a better opportunity to place some longer hedges in place if you are GBP sellers, we’ve seen a pickup in action looking to hedge over the horizon deadline in March.

Stateside and US President Donald Trump has once again come out making comments on the Feds rate increases. It’s not the first time and it certainly won’t be the last time the President makes his voice heard on the issue. Despite the Feds mandate to remain independent, Trump likes to force the issue saying he does not like how fast the rates are rising and given inflation in the US remains relatively sticky, there is no need to hike rates. This saw the USD give back some of its gains and drop back from near two month highs (USD index) but we’ve seen some strength return this morning. The fact remains the US economy remains stronger than its peers, the Fed have long discussed the return to a new normal level for interest rates following a decade of accommodative policy. The Feds Evans speaks later on Monetary policy and for now the USD holds firm.

The Italian budget saga continues to unfold with an independent watchdog saying that government targets were too optimistic, there is some talk of intentional sabotage from Italy’s leaders, they do not want to openly challenge the EU or the euro but by creating a bond route they just may well achieve that objective. A huge amount of old Italian wealth is stored in government bonds, widening yields and progress towards default will cause concern for many including those who voted in this government. We may not be looking at the new Greece just yet but Italy is not going away and the euro will continue to feel the pressure. This will only rise further as Italy and its debt is far more intertwined into the European financial system than Greece ever was. The euro is once again facing challenges.

Away from politics and the headlines and we can finally look forward to some fundamental data. The morning is choc a bloc with UK figures from Trade Balance data, industrial and manufacturing production and August GDP figures. Given the recent rally in sterling and the under-performance of the economy, with August GDP expected to slip to .1% from .3% there is the chance of GBP selling. The .8730/.8700 area has long provided support for a bounce, in fact this region has seen EURGBP bounce higher on no less than 16 occasions in the last year. The few occasions EURGBP has ventured back below .8700 it hasn’t continued lower. Probability favours a move back higher from here, especially with nothing actually fixed in terms of Brexit. GBPUSD will likely find itself capped ahead of 1.3300, for now however lower resistance at 1.3180 is just about containing the sterling rally. A drop lower targets 1.3030.

EURUSD bounced off 1.1430 area yesterday, with the 1.1500 currently holding moves higher. Sub 1.1530 is the lower range for EURUSD and a failure to gain traction above there should see the lows towards 1.1430 tested again by the end of the week, with August lows towards 1.1300 back in focus after that.