I think it is fair to say that the currency markets are treading carefully at the moment, with implied volatility rates heavily subdued as we see congestion and consolidation across the G10. Through much of 2018, the US economy was head and shoulders above the rest of its major counterparts, and this was clearly reflected in the respective exchange rates. However, the pace of activity has clearly slowed, and optimistic calls for another 4 rate hikes from the Fed were soon dampened, not least of all due to the impact on stocks once long end yields reached key levels – notably 3.45-50% in the 30yr. 10yr topped out around 3.25%, but the Fed’s stance clearly unnerved investors who piled out of US stocks at the end of last year.

Since then, we have seen a recovery which has outperformed expectations for the most part. All 3 major indices are pushing on key technical levels, bolstered by hopes of a US-China trade deal which will ultimately do little to address the fears over the China slowdown and the impact of global growth as a result. Nevertheless, the carry trade follows sentiment in stocks, and with the BoJ maintaining its current policy of asset purchases, we can see little past ongoing JPY weakness at the present time. Naturally, the correlation with equities will play a major part in future direction, though we can only see a material turnaround in JPY if or when the Japanese central bank hints at potential tapering. There is a clear alignment in the way in which US stocks and USD/JPY continue to grind higher, albeit with limited progress, though this should be enough to suggest sideways price action in the latter.

Sterling has been the only currency offering improved volatility and movement seen around the Brexit votes last week saw the Cable rate testing under 1.3000 to the downside. This was ahead of the meaningful vote on Tuesday evening, and with news from the Attorney General that the improved concessions offered little change to the risk of being ‘trapped’ in a customs union, the market pre-empted a second defeat for Theresa May, which eventually came to pass. 1.3000 managed to hold after a failed attempt on Sunday night to test the 1.2900-50 support area, and as it becomes apparent that the vote to reject no deal was going to attract a majority, the spot rate pushed higher and eventually went on to test 1.3400. We failed just ahead of this, and we have effectively set a near term range, where either side will only be tested once we get a clear outlook on the Brexit process from here on out.

As it stands, statute keeps a no deal Brexit come 29 March on the table even if last week’s votes say otherwise. This should preserve the above range at the very least, if not, develop into a slow grind lower back into the mid 1.3100’s where we note a bank of support looking to position for a deal (of sorts) come the end of March or June. We suggest a longer delay in Brexit will likely further confuse the market, and lead to a wait-and-see period of consolidation.

EUR/GBP has provided a strong outlet for reflecting lower odds of a no deal outcome, but this has accompanied a period of EUR weakness which saw the EUR/USD rate falling to marginally new cycle lows in the aftermath of the announcements from the ECB earlier this month. Whether the latter has developed a meaningful base in the near term depends on the data series from Europe. Ultimately, Europe is heavily export-dependent, so it is hard to see a significant recovery based on the fundamental backdrop, as slower global growth will continue to reduce demand. EU elections later this year will infuse a further period of uncertainty, as will the Brexit outlook which – as we have seen – has also dictated some of the play in the EUR in recent months.
We saw 1.1175-1.1200 as a key area which managed to hold firm post ECB, so from here, a move and hold above 1.1450 is what could potentially signal the prospect of higher levels, though the driver, in this case, would be USD weakness more than renewed confidence in the EUR.

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