The USD continues to be a hot topic in currency markets, the greenback recovered slightly yesterday after some selling on Monday, following 12 straight days of advance. The USD index still remains in 13.5 year high territory, and USDJPY is up over 10% from the election lows hitting a 6 month high on Monday and remaining around those levels. Stock indices in the US also continue their press higher as business optimism is buoyed by Trumps pro-business stance. It is not just the US experiencing gains, in Europe benchmark indices traded higher through yesterday, although the Euro still finds itself under pressure and in a bearish downtrend, despite an attempted recovery through yesterday which fizzled out. Elsewhere GBP remains exceptionally volatile as news flow from Brexit continues to create turbulent waters for the pound, although it remains well off flash crash lows for now. There are still plenty of questions out there as too why stocks are taking such a positive turn, but the old adage “if you can’t beat ‘em , join ‘em “ appears true as we watch Asian markets trade to fresh one week highs overnight as they try to share in Wall Street’s exuberance. Japan was on holiday but the S&P/ASX advanced close to 1.3%.
The rise in the USD has been based on the expectations of increased fiscal stimulus from the Trump regime, and with markets now almost fully pricing in the prospect of a Fed rate hike in December, they are beginning to look past that into next year’s horizon and the prospect of additional rate hikes. Here is where things get tricky, we saw something similar last year when the Fed raised rates in December, only for the USD to plummet through much of the first half of the year as rate hike expectations shifted from an additional 3 or 4 rate hikes, to only one (this December likely). We are also weary of Trumps huge fiscal stimulus plans, while also planning on cutting taxes, especially as the debt ceiling is due to rear its head once again in Q1 next year. How exactly all this is financed, in a rising interest rate environment has yet to be tackled. We have also seen Trump vocally against a stronger USD as it impacts US businesses! For me there are too many unanswered questions and while the US economy is growing, the pace has not been anything exceptional and job creation has notably slowed in H2 this year. Fed guidance for additional rate hikes next year will be key for the USD’s direction going forward, as will how Trump actually plans to deliver on all his big plans. The US is on holidays tomorrow for Thanksgiving but ahead of us today we have durable goods orders, jobless claims, U of Michigan confidence data, housing data and the kitchen sink. All in their own right have the ability to knock USD, combined ahead of a holiday and in thinning liquidity…….we can expect some volatility this afternoon across USD pairs.
All eyes in the UK will be on the autumn budget statement, due to be delivered at 12.30. Data wise the UK has shown resilience since the Brexit vote but for many it is just business as usual for now. The impact of Brexit has been on the value of GBP and that is likely to be shown in broader data into the New Year while we are already seeing its impact in inflation figures. It is also hard to look away from Brexit talk when looking at the pound and we’ve seen GBP selling over the last 24 hours following a resurgence of firm comments from EU leaders, as well as comments from UK Parliament as the Lib Dem rep, Verhofstadt suggested the “four freedoms (of the EU) are non-negotiable”. Key areas for GBP are as follows.
EURGBP: .8650 100 day moving average acts as resistance on the bear move lower, a break above there and we’d expect to see progress back towards mid 88’s. Support just above .8500 holds for now, a break below there and we would be targeting a move back towards .8320.
GBPUSD: under some downside pressure today. Resistance to the topside comes just above 1.2500, with any move there quickly running into selling. Support now towards lower 1.2300 looks to target as sterling is sold. A break sub 1.2300 opens up recent lows towards 1.2100 /1.2140 area.