Yesterday signaled a reversal in fortunes for the USD as technical set ups for the greenback posted some reversal indicators to the recent selling. We pointed out the potential for a USD rally yesterday as focus turned back on data rather than government policy and that is just what we got. The data itself was somewhat mixed yet the dollar had momentum behind it, with the USD index rallying some .9% from yesterday’s open. GBP was mixed, the pound held gains against Euro and Yen, while losing ground to USD through the latter part of the day, however thus far this morning sterling weakness is more broadly based. The Euro found itself facing some pressure as both USD and GBP buyers were dominant against the single currency. Risk took a breather, with European stocks holding around 1 year highs with moderate gains, while in the US small declines were seen following Wednesdays runs of fresh record highs, with only the Dow showing green. As we enter the last few trading days of the month major currency pairs find themselves in an interesting position, the USD is notable weaker from where we rang in the new year, down on the month against Euro and GBP, while EURGBP is almost exactly where it opened after a near 9% round trip from lows to highs. Interesting GBPUSD cover a similar round trip dropping almost 3% to fresh lows before a 5.7% rally picked it right back up, we wouldn’t expect GBP volatility to subside any time soon.
We have been quiet on the Euro this week, there has been very little in the way of major data and with the ECB backstopping the region with the promise of continued easing the euro tends to take its lead from more dominant currencies. We have pointed out the currencies position as a safe haven in the past, which affords it some demand in times of stress in markets, however this week we saw it rally to 6 week highs against the struggling USD, while at the same time falling to 4 week lows against the rampaging pound. That in itself paints a clear enough picture for how the euro is positioned. As long as the ECB sound cautious about recovery and continue to flex their easing muscles, then Euro strength will be limited, and prone to downside as other currencies find demand, for now the Euro will remain a follower. EURUSD broke through some interesting support as it broke through January’s rising channel before finding support just below 1.0660. That holds for now but further downside towards 1.0585 attracts if that gives. EURGBP ran into buyers just below .8480 support and has since found itself back above .8500. .8535 is key here a break above there may see the pair look back towards .8600 area before it looks to really retest the .8315 area where the GBP sellers are lined up in wait.
UK GDP was better than expected yesterday but markets chose to sell GBP. Once again proof that for the pound fundamentals are not the driver, it is solely all around Brexit sentiment. Now the makeup of the better GDP figures was concerning, the 2.2% figure was heavily covered by the services exports sector and debt driver consumer spending. This certainly leaves the UK exposed and those saying the UK economy is performing great despite Brexit, are still not taking into account the hardship has not begun yet. The immediate blow has been softened by ultra-low rates and a business as usual attitude for many, however Article 50 will change that, and then we will need to see the real colour of negotiations. The pound will almost certainly experience weakness again. GBPUSD fell short of 1.2700 with support around 1.2530 area now holding the pair, a break below there should see 1.2500 quite quickly.
It was a strong day for the USD as a number of technical breaks helped the greenback surge. On the back of heavy selling for much of the month it is no surprise to see some bounce before month end, but markets were also able to focus away from Donald Trump and more on the current state of the economy. We still do not think the data is strong enough to support 3 rate hikes this year, but with positioning still in favour of at least two, anything positive on the data front will help the USD’s cause, in the shorter term at least. The real focus however will be on today’s GDP print, with growth of 2.2% expected. We also have durable goods orders due to cross the wires and this is often used as a barometer, however similar to the UK, the concerns is that with focus on Donald Trump, markets may chose to ignore that data of its anywhere close to estimates.