FX Weekly Take – Just how long with this low volatility last for?

The question in the title is the question which is on everyone’s’ lips at the moment, everyone and anyone focused on currencies at least.  As is widely telegraphed, G10 implied and actual vol rates have been depressed to levels last seen in 2014, and at a time when global risks are plenty.  We need hardly mention Brexit, trade tensions with China or the European economic slowdown, which as we have seen from reactions to the PMIs in recent months, has hit global sentiment through the equity markets.  How quickly stocks recover comes as little surprise these days.  After a healthy tranche of Chinese data recently, fears have abated with the added backdrop of what many now see as the end of the Fed tightening cycle.  I would concur with this view at this stage, with last years projections of a neutral rate of 3.5% (10yr) a clear stretch, as proved by the reaction in risk assets when Treasuries hit 3.25%..  We are at neutral now and a stable inflation rate along with mixed US date validate this.

So what is driving the FX markets? In short, carry.  All one has to do is look at the USD/JPY rate to see that currency investors are happy to earn differentials, with the major currency pairs all having seemingly reached their extremes against the greenback for now.  This seems to be the effective response to the change in Fed stance to neutral, and one would have reasonably expected to see a more pronounced adjustment in the USD but for the concurrent shift among central bank peers.  The USD has still managed to claw out new highs in certain cases, as confidence plays and will continue to play a key part in currency flow at present.

EUR/USD eventually took out the previous cycle low of 1.1215, but only managed to extend this by less than half a cent, and the 1.1150-1.1200 zone provided ample support from which we are attempting to form a base.  The above area has some historical context in that it formed the final platform from which the EUR generated its move through to 1.2000+ levels.  How economic climate has changed, yet it is not hard to see why as all export-dependent regions are suffering at the moment.  In light of this, the recent improvement in Chinese data could have lightened the mood on the EUR, but ahead of the European elections, it is hard to put faith in any meaningful recovery, and so it has proved as we struggle through 1.1300.  Recent concerns from policymakers at the ECB that growth forecasts could be a little optimistic in the second half of the year have also pulled the rug from under the feet of the EUR this morning, so near term consolidation is as good as it gets for now.  Do not rule out a fresh push towards 1.1400 however.  USD softening may offer this opportunity as liquidation risk cannot be discounted given current exposure.  We may even see an improvement in the next round of Eurozone PMIs for April which are due out on Thursday.

Underperforming across the board now is the CAD, where next week‘s BoC meeting is being viewed with a dovish leaning.  Add in housing market concerns along with one of the highest levels of household debt amongst developed nations and it is not hard to see why traders are ignoring the usual correlations such as Oil price and broader risk sentiment.  Sticking points around the 1.3400 may prove temporary, so at this point, I am not going to rule out a return to 1.3600-50 against the USD.  Positioning may be better served away from the greenback, though it again begs the question where?  Watch out for Canadian inflation numbers tomorrow, which are spiced up with trade data from both sides of the border.

One currency I had high hopes for was GBP.  Parliament and now the government have distanced themselves from a no deal exit, and while softer Brexit options, including a customs union attached to the withdrawal deal and/or a second referendum, outnumber a negative outcome, the balance has been tipped again as Westminster is abuzz with talk of a general election.  Would it break the deadlock? Can the country stomach it? Strong arguments for no in both cases, but nevertheless, this has reined in the prior aggregate of probabilities which could have warranted a Cable move towards 1.3300-1.3400.  1.3380 was the peak of optimism after the House of Commons voted against a no deal, and this looks pretty safe unless there is a breakthrough in cross-party talks continuing during the Easter Break.

There were faint hopes that the market would refocus a little on domestic data, though the healthy employment report on Tuesday morning did little to shake GBP out of its tight ranges, with EUR/GBP hemmed into 0.8620-60 for now.  Cable has covered 1.3070-1.3100 over Tuesday’s session at the time of writing and highlights the lack of conviction in the absence of any major news, leading to this heavy congestion. Inflation data tomorrow is likely to be a non-event, and this is exacerbated by fading market (and business) expectations of a rate hike inside the next 12 months.

Elsewhere, growing interest in the Nordics seems to favour the NOK over the SEK with the cross rate having pierced the 1.0900 level and showing little sign of relent. The Norges bank is going against the grain and has hiked rates by 25bps this year, with another move in June priced in by a little over 50%.  In contrast, the Riksbank is happy to sit on the sidelines with negative rates, and the narrative is that the Swedish central bank is waiting for the ECB to pull the trigger first.  Perceptions will change if inflation feeds through.  CPI is back close to 2.0%, growth is healthy in relative terms as are public finances alongside a positive current account, so I fail to see what there is not to like with the SEK further down the line. Naturally, negative rate differentials are a factor as I have pointed out already, so the obvious route looks to be EUR/SEK looking ahead.

However, price action seems to warrant caution here, as bouts of EUR weakness have tended to have upside impulses to EUR vs SEK, NOK, and PLN.  Contagion fears can spark sharp corrections, so Eurozone data risks have and will dent sentiment on no-EUR Europe.   The NBP could also surprise with a hike over the coming year, again due to a pick up in inflation, though we are still some way off the central bank’s 3.5% upper limit.  Even so, it seems the EUR (PLN) cross rate is eyeing a move on 4.2500 support in anticipation of this.

Finally, AUD looks intent on holding 0.7000l.  The figure level sees plenty of 2-way business and with commodity prices higher on the back of the near term improvement in China’s PMIs, it is not hard to see why.  Resilience in the currency is all the more impressive given expectations of rate cuts later this year – something which gained some traction after the RBA minutes on Tuesday.  It is too early to say if this is priced in, just as it is to say China’s slowdown has been halted in its tracks.  For now, it is a case of making hay while the sun shines and there is nothing to say AUD/USD gains will top out at 0.7200.  0.7300 and 0.7400 targets have equal significance on the daily charts if we do break higher, but these constitute medium-term targets in a positive risk environment – of now.  There has been a breakdown in the correlation with equities in recent months so there is an element of catch up play here.  The AUD/JPY proxy has fought its way back into the picture as a result with the recent range break of 79.60-80 aided by the carry hungry USD/JPY rate.

FX Weekly Outlook – 18-22 March 2018

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.

Weekly FX Outlook – 11/03/2019

No surprises for guessing where all and sundry expect the volatility to come through this week as the Brexit circus rolls out the main acts starting with the meaningful vote on Tuesday evening.  Sparing the rundown on what to and what not to expect, the plethora of coverage makes it pretty obvious that either parliament votes for the current deal or we effectively decide on ruling out a no deal and ensure a soft quasi Brexit.  Do the probability of outcomes warrant a material drop in the Pound at this stage?  We would suggest not, as it is clear both sides will suffer in a no deal scenario and anyone keeping tabs on parliament will see there is a majority to reject this – irrespective of how this impacts on the UK’s negotiating leverage.  Our base case scenario is that – albeit at the 11th hour – one or both sides will avoid the worst of possible outcomes.

From a purely technical perspective then, we look to the 1.2850-1.2950 zone as a significant area which should define whether we could see an early base forming, so soon after 1.3000 gave way last week.  We anticipated a little more support ahead of this psychological level, but late week/pre-weekend fear and jitters gave Sterling little chance of stability in this context.  We maintain price action and the time zones they trade in have a strong bearing on where and how far levels can be stretched.  It abundantly clear that traditional technical analysis is losing touch with the modern day trading patterns.

From a fundamental perspective, EUR/GBP perhaps confounded many with the way it pushed higher on Friday, so soon after the dovish actions by the ECB sent the EUR down through cycle lows to test the 1.1175-1.1200 area vs the USD.  EUR/USD is now widely expected to test towards 1.1000 over the coming weeks, though we will need to contend with further support in the low 1.1100’s to challenge this pivotal level.  Given its historical relevance, we would argue that only the prospect of an existential Eurozone crisis will drive the EUR below here.

From current levels, we will need to assess how the medium term outlook develops in the key member states, with Germany’s economy having caused justifiable concern as its manufacturing PMIs remain below the 50.0 mark.  Only this morning, we saw industrial production falling 0.8% in Jan, as well as its trade surplus narrowing once again.

In the current climate of fragile global demand, all export-reliant regions are undergoing testing times, and US-European trade tensions are still lingering in the background.  This may be alleviated for a temporary period if US talks with China can yield positive results, as we expect some presumptuous follow through into the EUR.  For now, trying to establish a base in EUR/USD is not only premature but also offers little prospect on the upside based on the economic climate at present.

Optimism over a US-Sino trade deal was reinforcing the carry trade up until the middle of last week, after which time the cumulative impact of central bank caution (heightened by the ECB) led to a brief fallout in risk assets.  This seems to have stabilised again with Wall Street equities grinding higher again pressing on the JPY once more.

USD/JPY managed to hold off a resistance area capped by 112.30-35 last week, which may well serve as a longer-term top, but as long as 110.25-30 holds firm on the downside, we expect flights to safety favouring the USD to some degree, which will continue to takes out a large tranche of volatility in this pair.

There is also a lack of response to a softer tone from the Fed, which as is now widely acknowledged as a positive backdrop for risk assets in DM.  It is our belief that the only real catalyst for a sharper move in USD/JPY is likely to come from any tapering expectations from the BoJ, who at present, stick to their ultra easing bias though global asset purchases.

The commodity-linked currencies seem to be drawing little inspiration from broader sentiment, with dovish turnarounds from the RBA and BoC proving to be the ultimate driver for AUD and CAD respectively.  The traditional correlations have been sporadic, to say the least, but we can see little respite for the AUD as long as fears over China’s slowdown persist and the how slowing demand will eventually impact on Oil prices and the Canadian economy.  The BoC made a point of citing caution on activity and output based on the outlook for Oil prices ahead.   CAD buyers are likely to be tempted in should we see a spike above 1.3500, but at this stage, broader themes have not ruled out a stronger move towards the 1.3600-1.3800 region as yet.

AUD/USD set out its parameters at the start of the year by hitting levels in the mid 0.6700’s, and at some stage, we expect a move back to test these levels if/when China’s slowdown gathers prominence again.  After the recent stimulus measures from China, we would have expected a stronger response from the 0.7000 area, but the reluctance perhaps tells its own story.  0.7120-0.7170 is a region we are keeping an eye on, but the lack of momentum suggests this area will contain trade unless we get a material turn in the US data.
USD prominence continues to highlight, or more so reflect the lack of viable alternatives at present, though net exposure is making for a challenging environment in G10 FX as USD strength also has its limits.  Markets are pricing in a flat year at the Fed, and this is consistent with our view.  Policymakers still believe there is scope for another hike this year and next, but only significant wage inflation will force their hand against a sensitive equity market.

FXDaily Morning Report – FOMC risk as the pace of balance sheet runoff in question

A WSJ report last week set the cat amongst the pigeons on Friday, as the question over the balance sheet runoff was brought to light.  While it is now widely acknowledged that the Fed is set to pause on its series of rate hikes, some are now considering the possibility that the pace of quantitative tightening may be addressed in order to further ease up financial conditions for both the financial markets and the real economy.  Despite the fact that equity markets have materially stabilised, the story has gained traction and the USD has softened as a result, with notable losses seen against some of its weakest counterparts.

The EUR is a clear case in point, with the ECB now clearly concerned about the persistent weakness in the Eurozone data, in what has so far been assumed to be a correction in the strong pace of activity seen through 2017 and very early 2018.  As a result, the governing council sees risks skewed to the downside, though this was already firmly priced into the markets given rate normalisation has been pushed further out into 2020.  Nevertheless, EUR/USD only managed a brief dip below 1.1300 and has since tested back above 1.1400 again in what looks set to be some very tight ranges ahead as we go into the FOMC meeting this week.
Elsewhere, the Brexit mood has been lifted by widespread agreement within the House of Commons that a no deal outcome should be avoided at all costs, but how this then translates into affirmative action remains to be seen as we look to the start of the debates on the various amendments which will be put forward and voted on from Tuesday this week.  In recent weeks, GBP has readjusted the risk probability of a hard Brexit, though optimism may start to run out in the days ahead as we get back to acting on the way forward.  Optimism is one thing, but can only carry GBP so far.  NY desks, followed by Asia today, pushed the Cable rate through 1.3200, but we are seeing some moderation this morning as the realisation that a no deal Brexit is not completely off the table yet.
We then come onto the Fed impact on risk.  Should the FOMC communicate openness towards a resumption in reinvestment, then we expect to see risk assets receiving a further boost over coming weeks.  There are however many crosswinds to consider this week, not least of all the earnings reports out of the US from a number of key names – Caterpillar today, Apple on Tuesday.  We also have the Chinese delegation traveling to Washington this week to resume talks on trade, and while there have been mixed signals from members of the Trump administration on progress – of the lack off – we know at that intellectual property remains a core issue in breaking the deadlock and avoiding an increase in tariffs, which would come into effect at the start of March if negotiations do not bear any positive results.

In the meantime, AUD, NZD, and CAD continue to stay on the front foot, though conviction looks unconvincing as yet.  Based on the fact that bearish sentiment on stocks can return at any moment, bullish sentiment is a long way off, with recent moves here looking corrective at best.  We could pick out the CAD as perhaps the pick of the bunch given Oil prices have stabilised.  There is also the backdrop of continued expectations that the BoC remains on course to raise rates again at some point this year, narrowing differentials with the US as the Fed decides to pause for now.

Ending with USD/JPY, the spot rate is caught between a rock and a hard place.  As USD sentiment will be tempered by that of the mood in stock markets, we look set to remain in a state of limbo over coming sessions, so expect little in the way of movement unless we get poor earnings results this week.  109.80-110.30 continues to provide strong resistance up top, but we cannot help but think that the early Jan ramp in the JPY, and subsequent sharp reversal, has underpinned the downside in the near term.

Forex Analysis: Morning Bullets


* US Senate failed to vote for an end to the government shutdown last night as president Trump refused to budge on his demand for border wall funding.

* Trump is preparing a draft for a national emergency order to get his wall funding through.

* US Kudlow says China must deal with intellectual property theft in trade talks.

* US-Japan trade talks delay as White House focuses on China.


* This morning, ECB’s Villeroy says that external factors and uncertainty have been largely behind the slowdown.

* ECB Coeure says the slowdown has surprised the governing council.

* German IFO survey out this morning – looking for marginal weakness in the business climate, though expecting another miss.


* Last night, a report in the UK’s Sun newspaper that the DUP would accept the Irish backstop if a time limit was attached gave GBP a boost.

* Focus on next week’s start of the debates on plan B – GBP has been enjoying strong gains this week, helped by data also (healthy jobs report).

* CBI Distributive Trades Survey for Jan due out this morning.


* Uncertainty over Chinese growth this year prompting bearish calls on AUD across the board – some as low as 0.6000!

* Little on the docket to drive trade – Asia quiet, focus on risk sentiment, Wall St futures steady.


* Oil prices trying to push higher again to give the CAD a modest lift today.

* Canadian budget balance out this afternoon.

Forex Market Analysis – Morning Bullets


* Reports that White House has cancelled meetings with China over IP issues has been denied by Larry Kudlow.

* US press reports that the government shutdown may delay the issuance of tax refunds.

* Senate will vote again on reopening the government – 2 bills, one for Republicans to provide funds for border wall, other to open without funding – both expected to fail.

* US house price index data for Nov due later today.


* UK Trade Min Fox will use the Davos meeting to discuss replicating EU deals.

* Rees Mogg maintains that the Irish backstop is the only obstacle standing in the way of ERG (Brexiteers) voting for PM May’s deal.

* BoE’s Broadbent speaking later on this morning.

* CBI Industrial Trends Orders for Jan out mid-morning.


* All eyes on tomorrow’s PMIs and the ECB meeting thereafter – EUR in limbo until then.

* French Jan business confidence index down from 103 to 102 as expected.

* EU’s Moscovici says economic clouds are down to external factors.


* NZ CPI came in a touch higher at 1.9% vs 1.8% but is net unchanged from prior reading.

* Westpac-Melbourne Institute leading index down -0.2% in Dec.


* Nov retail sales due out this afternoon.

* API weekly crude stocks data out this evening.

Forex Analysis: Morning Bullets


* Yesterday, we heard president Trump say that the Chinese growth data shows the need for a trade deal.

* The US is set to proceed with the extradition of Huawei executive according to the Canadian press.

* US existing home sales due later on today.


* Cabinet member Rudd tells the PM that a number of MPs are ready to quit if she pushes for a no deal Brexit.

* Growing calls from Tory MPs to allow for a delay in Article 50.

* EBS FX and Swaps operation moving to Amsterdam.

* UK employment report and public borrowing figures out this morning.


* German ZEW survey is this morning’s focus in the Eurozone.

* EU Commission has cut Italy’s growth forecast in 2019 to 0.6%.

* Key weight for EUR this week will be the ECB on Thursday as well as the Jan PMIs the same day.


* Chinese CEOs are targeting Australia as a major growth market according to the Australian press.

* Global growth downgrade by the IMF adding to negative risk tone this morning.

* NZ BusinessNZ services PMI falls to 53.0 in Dec from 53.5.


* Oil prices having less of an impact on the CAD as we see a broad-based pick up in USD demand.

* Lower Gold prices highlight early year demand for USDs away from all other major currencies.

* Canadian manufacturing and wholesale sales for Nov due out this afternoon.

A familiar triumvirate moving in tandem

Once again we are seeing the trio of US rates, currency and stock markets moving higher, reinstating the theme which based on evidence last November, has limited potential given the sensitivity to higher interests on equity valuations.  In the first instance, the recovery in stocks is as yet a moderation in the heavy sell-off seen in the latter months of 2018, and allowing for speculative short covering in the broader indices coupled with a reallocation of funds at the start of the year through discretionary and sectoral bias, we may have a little way to go on the upside before nervousness begins to set in again.
While optimism over a US-China trade deal is also a major factor in the positive change in risk sentiment, we must not forget that the Fed is still reining in the balance sheet and financial conditions are very steadily tightening in the background.  In light of this, the latest pick up in Treasury yields will at some point impact on stocks, and/or start to ease off and set up another potential recovery in mid-curve Treasuries.  At current levels, we would expect to see some degree of caution from portfolio managers, but the US economy continues to stand out above its major peers, despite nominal growth levels in China still outperforming in the global economy.  There are greater concerns on the structure of China’s growth going forward, namely that infrastructure spending has comprised a large part of GDP and output over the last decade and that we are potentially nearing exhaustion in terms of effective viability and profitability of any fresh projects in the future.  China is trying to transfigure its economy towards internal consumption and naturally, this takes time.  Based on this broad-based overview on China, the US remains the go-to-economy at the present time and as a result, we are seeing a continued bid in the USD.
There is another obvious factor in that despite attempted repricing of Fed rate hikes this year, divestment away from the USD requires a viable alternative.  Given the malaise in Europe on a number of fronts, headlined by the economic downturn in Germany, we are unlikely to see a readiness to shift away from the greenback until we get a clear reason to do so.
A resolution in Brexit will naturally prompt a readjustment in the Pound, though this is easier said than done.  At present, the political quagmire parliament finds itself in leaves many to believe that the withdrawal process is very likely to be delayed, if not reversed should proponents of a second referendum get their way in the Commons.  That said, there is a growing realisation that a second vote is perhaps not as popular as it may seem, with many of the Conservative party keen to preserve democratic integrity and this is shared by a number on the opposition benches according to recent rhetoric.  The Brexit mood-gauge (for want of a better phrase) now looks to more inclined towards a deal in order to leave the EU in an orderly fashion, though the power remains in the hands of the EU for as long as the UK refuses to countenance a no deal Brexit – fact!
In Europe, the ECB meeting later this week could prove instrumental in the direction of USD through what is leading component in the DXY – the EUR.  Having failed to capitalise on the breach of range limits at 1.1500, we are once again resigned to a narrow range inside 1.1300-1.1500, where a breakdown of the lower level may well see the USD extend its quest for higher levels – the headline rate still providing to the lead for the rest of the major USD pairings in the current climate.  The Jan PMIs will be a major factor when released later this week – ahead of the ECB meeting in fact, so we expect this to be one of the key market catalysts this week in an otherwise lethargic market for macro-based instruments – reflected overwhelmingly in FX.

Forex Analysis: EUR/USD Technical Analysis

Bearishness in EURUSD continues, in this weekly chart price bounced off the 1.1490-1510 area and has now moved toward the uptrend line marked on the chart.

If the trendline breaks we may move lower toward the 1.10 level.

The trendline level could be used as support.

The downtrend which started at the beginning of 2018 is still intact.

1.13 has looked sticky in the past and looked like a base formation but if it breaks the lower low, lower high sequence continues.

1.1186 is the 61.8 Fib retracement level.

EURUSD seems to be oversold and the repricing of the rate hiking cycle by the Fed did point to USD weakness. The Gov. shutdown does not seem to have affected the USD as much as expected but Europe has its own issues with Italian and French budgetary concerns as well as Macron policy discontent in France. Stock markets have moved back to being risk on and the US-China trade deal could unwind some of the USD strength. Having said that its still a pretty bearish looking chart, keep an eye on the trendline and the consolidation low of 1.1216 for clues.

FX Analysis: Stalemate in the currency markets as the Dollar continues to stand out

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.