Short on narratives, we continue to see the major currency pairs trading in extremely tight ranges, with the majors having threatened a breakout in response to the Fed repricing in the rates market. That the USD looked to redress some of its strength from 2018 looked inevitable to some degree, but despite a shallower path of rate hikes projected, the fact remains that the greenback still offers yield as well as safe-haven status amid instability in the stock markets.
In the past week, Sterling demand has picked as market participants warm to the prospect that the UK parliament is in agreement on avoiding a no deal Brexit at the very least, even though turning this into something tangible whilst also trying to negotiate a better deal with the EU is still a mammoth task which risks political upheaval to some degree at least. Nevertheless, we are seeing marked gains against the USD and the EUR, with the latter offering the more comfortable route in light of economic weakness in the Eurozone and domestic troubles in France leaning on the single currency.
Gains against the USD may well see us testing levels closer to 1.3000 to 1.3100 before we start to level off and consolidate, and lest we forget, the UK is trying to find agreement on the withdrawal deal, after which the real trade negotiations begin. This is not over by a long shot, but as noted above, the market is short on fresh narratives and the recent developments in the UK – aided by Theresa May’s government winning a vote of no confidence – allows for some price adjustment in the Pound.
As for the EUR, markets need to see some moderation in the regional data to even begin to start considering some relaxation of pressure here. One potential positive for the region has been the drop in Oil prices, which should feed into some degree of profitability in margins. Europe is a major importer of Oil, and while waning global demand has been hitting exports, lower cost inputs could see some better figures on the horizon to a modest degree. Against this, headline inflation which is the ECB’s single mandate will come under pressure, but as noted from the president, all eyes are on the core rate which has stabilised around the 1% mark. If we see some modest upturn from current levels, then we expect this to improve sentiment on the EUR in the interim.
Hopes for a breakthrough in the trade talks between the US and China are looking a little more doubtful than they already were, so any positive carry-through sentiment for the Eurozone also seems to be evaporating again, especially after recent reports the president Trump is inclined to move ahead with auto tariffs. Even so, we have been trying to base out again, and while it is too early to call the 1.1215 lows from last year a meaningful base, there is room to test the upside a little more without disrupting the overall medium-term downtrend from the highs seen in 2018.
Among the risk-correlated currencies, there still seems to be little to differentiate between the usual suspects. Barring the sharp move in the first week of the year, we can see AUD/NZD moving in a very tight range with a modest upside bias more recently. Ranges with the CAD are also contracting, and we have seen little else having a notable impact on the Canadian currency other than oil price of late. The USD adjustment may well have run its course against these pairs, and judging by the cross rates, look set to underperform based on our negative outlook on risk appetite going forward.