FX Update: EURUSD and GBPUSD eyeing downside breakouts

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The yen and EM currencies broadly are at the opposite ends of responding to the bounce in risk appetite and commodity prices over recent sessions, as a pair like MXNJPY even managed new 9-month highs briefly this morning. Elsewhere, within G10 the bounce in the smaller currencies looks muted and correlated with the still fairly weak bounce in commodity prices.


Trading interest

  • EURUSD and GBPUSD tilting hard on support levels – bears in charge on a break lower of 1.1000 and 1.3000 today.
  • NZD: AUDNZD looking interesting at top of local range toward 1.0450, but may rely on more positive sentiment out of China that coronavirus impact is receding. NZDUSD is in full breakdown mode if 0.6450 area gives way as we looked at yesterday.
  • USDMXN overdone on downside in my book – but technically need a sharp bounce to confirm a divergent momentum setup.

Developments
US equities pulled to new highs for the cycle and safe haven bond yields picked up yesterday with a mixed reaction across markets. Is the US dollar taking its lead from US equities within the G3 (rising against JPY and EUR with risk on), while falling against EM on the same? That seems the pattern of late – let’s see if it continues. Elsewhere, the bounce in traditional risk-correlated G10 smalls has been less profound than in EM, probably due to both very low carry available and the fact that the commodity bounce-factback has vastly underperformed the surge in sentiment in risky assets.

As we point out in this morning’s Market Call podcast, the US yield curve remains flat to inverted, depending on which portion of the curve is in focus, a sign that the US Fed remains tight and behind the curve – tough, of course, to square this with the equity markets’ ongoing celebration of the liquidity provision/repos and the rate cuts in the bag. A lot of tension building here.

Many commodity prices have risen from the recent steep sell-off, but crude oil prices look very heavy and the NOK bounce and CAD bounces look likewise modest relative to recent sell-offs there. If supply disruptions continue, we could be set for new highs in EURNOK and USDCAD.

A slightly stronger than expected US ISM Non-manufacturing survey for January released yesterday at 55.5, but we note that the employment sub-component was at a multi-month low of 53.1 (but ADP payroll change at incredible +291k for Jan!) and the Order Backlogs sub-component printed its fourth month in a row below 50 and a new low at 45.5. All in all, less good than the headline suggested.

The Czech central bank is to announce its policy rate today – interesting to note across the CEE currencies the ugly negative real rates across the region, with the Czech central bank having been the only actor doing something about the situation, having raised rates to 2.00% from 0.25% starting in 2017. So while the carry may look attractive in EURCZK - the negative real yield spread is roughly similar if slightly better for Czech (although the December CPI print was at a new cycle high of 3.2% YoY) and EURCZK may be well supported in the 25.00 area if the Czech central bank continues to signal that it will sit on its hands.

Chart: GBPUSD
It is clear that the UK negotiations for a free trade agreement with the EU are fraught with risk and the latter has most of the leverage. The EURGBP pair can’t decide on a direction here, but the stronger US dollar is pushing on important breakout levels below 1.3000 and could be set for a positioning-inspired correction lower as it could be months before we have a sense of how the trade  deal is shaping up. Further cascade risks lower if the  1.09 area in EURUSD and 1.2900 area in GBPUSD give way on a deepening sell-off – perhaps putting the 200-day moving average into play eventually.

Source: Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Czech Central Bank Repurchase Rate
  • 1330 – US Weekly Initial Jobless Claims
  • 1415 – US Fed’s Kaplan (Voter) to Speak
  • 1530 – US Weekly Natural Gas Storage
  • 2230 – Australia RBA’s Lowe Testimony
  • 0030 – Australia Dec. Retail Sales
  • 0030 – Australia Q4 NAB Business Confidence
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.