FX Update: Markets on fragile footing as week gets under way

The market has been all over the shop by early US hours today – from slightly down this morning in very early European hours to then suddenly very down, driven justifiably by the narrative that concerns that a second wave of Covid19 outbreaks are dampening sentiment. And the worst aspect of this fresh round of concerns is that it is global, from Pakistan and a new outbreak in Beijing to record hospitalizations in Texas and even Chilean copper miners. As proved the pattern in March (with notable exceptions like GBP), the FX market volatility offers only a fairly weak echo of the gyrations in equity market futures. Liquidity is poor as we discussed on today’s Saxo Market Call podcast. By later in the day as of this writing, the equity market futures had about halved their worst losses intraday and the USD and JPY were on the retreat slightly after an earlier surge. The price action is jumpy and erratic, to say the least.

We focus again on GBP below, but in most cases, the general pattern in response to this now risk-on, risk-off (RORO) market is that the USD and JPY will view for status as strongest currency, with CHF trailing somewhere behind, while the Euro is middle-of-the-pack or slightly better, and the smaller currencies are all weak with slight differentiation here and there. If this sell-of (But the way, RORO automatically becomes the regime once market volatility levels exhibit the kind of volatility we saw last Thursday and FX traders can do themselves a huge favour in looking at how correlation risks across a portfolio pick up during these regimes.)

Some issues that are keeping us on our toes this week:

EU Council meeting Friday - This is the next key meeting for the heads of EU countries as we look for a sense of solidarity or lack thereof around the plan to expand the EU budget by some EUR 750 billion to fund a Covid19 response. We have seen little noise on expectations heading into this meeting.

US Fed Chair Powell to testify before Congress - we have just heard from Fed Chair Powell at last week’s FOMC meeting press conference, but the interesting angle this week for markets could be the degree to which Democratic members may look to criticize the Fed’s role in driving inequality and criticism that their efforts are rewarding the wealthy via a new market bubble. Loud criticism could affect Fed signaling at the margin as the 2020 election approaches. 

Bank of England meeting Thursday – with sterling already under pressure on the risks of a tough stance from the EU on the post-Brexit transition period trade deal uncertainty, the Bank of England meeting this week will be interesting for whether the BoE strengthens guidance on an eventual move to a negative policy rate regime. 

Chart: GBPUSD
We could have a volatile week ahead for sterling, as Brexit news could pick up with UK Prime Minister Boris Johnson calling for a trade deal by autumn but the EU not making any friendly noises and Mr. Johnson set to contact various EU leaders today. As well, the BoE is set to meet on Thursday as note above and could represent risks for the currency on any new negative policy rate guidance. Sterling survived an attack on critical levels this morning – above 0.900 in EURGBP and below 1.2500 in GBPUSD and has so far survived. We’ll use those levels as the tactical indicators for whether GBP can make a stand here or risks a bigger meltdown. Note that the 1.2350 area (61.8%) looks the next one lower if GBP suffers another attack, ahead of the sub-1.2100 lows, while a strong close back above 1.2650 looks necessary to rekindle upside hopes again.