Yesterday was a rather dull affair in currency markets, there was little in the way of major data or headline news and as such markets just followed the weekend headlines for direction through much of the day. GBP was a big loser as a result, sterling getting hit from every angle as fears that a hard Brexit will impact the UK’s current growth rates. EURGBP was up over 2% on this GBP weakness, while GBPUSD traded down over 1.3% from the weekend open, with eyes towards support below 1.2100. It was good news for the FTSE however, the weaker pound attracting foreign investors into relatively cheap stocks on a cross currency basis. The dollar itself was less than bid also, the greenback faring ok against the broadly weak GBP but losing ground elsewhere with EURUSD driving back above 1.0600, while JPY was also in control against the struggling USD, with the USD index trading lower to ring in the week and at one point had given back all of Friday’s NFP gains. Risk aversion helped safety linked currencies, outside of the fresh FTSE highs, European stocks struggled for momentum and sold off, it was a similar case in the US where declines across energy stocks and banks weighed on sentiment with the Dow pulling back from the market hyped 20,000 level. Only the NASDAQ was pressing higher as tech stocks fared better, pushing the index up almost .2% and to a fresh intraday high. Overnight the ship steadied somewhat, with early losses in the Nikkei erased to close flat while Chinese bourses traded relatively flat also.
We cannot highlight enough, how exposed GBP is to Brexit sentiment. Despite the strong UK data that we have seen and irrespective of inflation rising faster than expected, sterling can still run into a huge volumes of sellers on any headline that is perceived as negative or favouring a “hard” Brexit. The other side of this coin however is that May and co are hardly going to suggest they want a nicely nicely exit, it is in their best interest to make the EU and global markets fear for how aggressive a stance they might take, this will help their bargaining power when their hand is eventually forced by Article 50. The reality behind recent moves however is that we still do not really know how this situation will proceed, yet the recent GBP movement has been positioning for the worst. Sterling is approaching some key levels, most notable against USD and should we see a daily break and close below 1.2080 then we could well see further panic selling of GBP, which would accelerate GBP losses across the board. EURGBP has broken above August highs around .8730 and there’s little in the way to stop progress towards .8880 and then .9000 above that level. It’s just a matter of seeing whether there is appetite to continue buying Euro against GBP, especially as we progress towards the .9000 which historically has always favoured Euro sellers taking control.
As mentioned, the calendar was lacking any excitement yesterday but we did highlight two Fed speakers in the form of Lockhart and Rosengren who were on the wires yesterday evening. If you recall I mentioned last week that we need several things to line up should the USD continue its charge higher, one of them was conviction from the Fed and yesterday’s comments, in my view, do not fall into this category. Rosengren suggested it was hard to guess the number of rate hikes without knowing the Fiscal plans, although did see benefits in raising long rates while tightening the balance sheet. While Lockhart suggest the US recovery cycle has already occurred and that US growth will remain steady around the 2% mark. Not exactly the “hold on to your hats we’re raising rates” rhetoric I would expect. EURUSD is approaching its midpoint of the three month range, a break above the 1.0650/85 area could well see EURUSD favour upside towards 1.0900. It’s a quiet session on the economic calendar again today, we’ll likely have to wait until tomorrow for a chance of fireworks, and with Trump on the tap anything could happen.