FX Update: Historic sterling melt-down sends chills. FX Update: Historic sterling melt-down sends chills. FX Update: Historic sterling melt-down sends chills.

FX Update: Historic sterling melt-down sends chills.

John Hardy

Head of FX Strategy

Summary:  The sterling freefall from Friday continued in Asian hours overnight, crashing through its all-time low versus the US dollar at one point in awe-inducing downward spiral that suggests extremely poor liquidity and lack of confidence in the currency. The Bank of England will need to move quickly to shore up the situation, but does it have the leadership to do so? Elsewhere, the downside pressure on the JPY is building again as the USD and US yields rise.

FX Trading focus: Historic drop for sterling

Sterling’s downward spiral continued apace overnight after the Friday tax cut announcements from UK Chancellor Kwarteng sparked a landslide in the currency. I scratched my head early on Friday at the market not reacting more negatively and punishing sterling on the Bank of England’s mere 50 basis point hike on Thursday. Now I can see with perfect hindsight that for some reason the market was waiting for the crystallization of what is knew was coming all along: new tax cuts that will be a further disaster for the public balance sheet, with double-up pressure from the even larger and already announced energy subsidies continuing to drive yawning trade deficits. A bit surprised that the market wasn’t pricing more of this in before the fact, but in the end, the aggregate direction of UK policy and the BoE’s slow response justifies the price.

Now the Bank of England has its work cut out for it if it wants to stabilize inflation as inflation expectations and outcomes will have marched that much higher after a 10% drop in sterling’s trade-weighted value in a matter of few weeks. The policy rate expectations are already rising above 4.25% for the November 3 BoE meeting, with some of that pricing reflecting the view that the BoE will have to move between meetings and impress the market if it wants sterling to stabilize. Governor Bailey seems poorly equipped to deal with the task ahead, but the BoE will need to deliver. As for GBP – the magnitude and sharpness of the move since Friday may have to do with poor liquidity more than the absolute magnitude of Chancellor Kwarteng’s new announced tax cuts, but downside risks continue if sentiment and poor liquidity worsen further globally. Note EURGBP already having gone full circle from 0.8930 at the Friday close up to 0.9200+ overnight and then back near 0.8930 as of this writing.

An historic couple of sessions in the bag for sterling, which dropped to record lows overnight below the 1985 low point of 1.0520. This may or may not mark a major cycle low for the near term and has a better chance of doing so if US yields finally ease off (market crash risks rising every day that US yields continue spiking higher) and if the Bank of England delivers a stern message on doing whatever it takes to defend the currency. Resistance is now around 1.0800 (the spot that triggered a gappy avalanche overnight and then not until 1.1200. The obvious next psychological and round number is parity. The situation is fluid – as “the Bank of England is expected to make a statement today.”

Source: Saxo Group

The latest weekly Swiss National Bank sight deposit data sent an interesting signal in that the SNB’s holdings actually dropped, and by the most since it created these sight deposits as a means to fight CHF strength. The last time there was a significant drop in the deposits was just before and especially after the SNB’s surprise June rate hike that set in motion the significant CHF rally that took EURCHF from 1.0400 to well below parity in a few short weeks. Falling sight deposits suggest that the SNB is happy to buy CHF and sell foreign FX to keep the CHF on the stronger side of where it would otherwise trade. Perhaps the SNB would like to mix in some heavy reserve management to fight inflation with intervention and unwinding a portion of its gargantuan reserves rather than tracking the panicky pace of policy tightening elsewhere? The overnight action in EURCHF looks more linked with sterling’s woes, but USDCHF is trading up at interesting levels, clearing the range highs since July and eyeing parity soon after pulling above 0.9900 this morning.

Let’s have a look at the US 2-year treasury auction later today. For savers, shorter dated treasuries offer significant yield now, of course only really attractive if inflation moderates, but the current 4.25% yield offers solid yield and little duration risk. The last auction on August 23 saw middling demand when the 2-year yield was about 100 basis points lower.

And let’s also have a look at how China responds to USDCNH hitting new all-time highs above 7.20 after trading as high as 7.168 today. But the most pressure in Asia is on USDJPY after a Kuroda speech today brought nothing new to the table other than his justification for intervention. Don’t look now, but USDJPY is pulling back well above 144.00 in today’s trade. After all, US yields are trading well above their levels when USDJPY first nearly hit 145 more than two weeks ago (key US 10-year benchmark then was some fifty basis point below the current 3.78%. Expect the market to challenge the BoJ/MoF soon if yields stay up here or higher.

Italy’s election saw little market response and the right parties performed a bit weaker than the polls in aggregate at 43%, even if coming PM Giorgia Meloni’s Brothers of Italy party did well at 25% of the popular vote. The vote total does not offer an overwhelming mandate. As the new administration finds its feet, one key angle will be whether Meloni succeeds in rolling back some of the reform measures passed by Draghi as she has vowed to do. These reforms were part of the terms for Italy accessing the eventual EU pandemic recovery budget of EUR 200 billion for the country.

Table: FX Board of G10 and CNH trend evolution and strength.

The USD strength reading is getting to unsustainable levels beyond the nearest term with its current reading above 8, but given the connection with spiraling sentiment, could yet end in a further climax before reversing. GBP is in a deep funk now, falling at a rate that will likely elicit a BoE response soon. NOK is also very weak on the Norges Bank’s curiously dovish guidance and crude oil prices getting pummeled.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note NOKSEK staying negative even after the recent spike and now falling to key chart areas again down into 1.0500 if it continues to sell-off. GBP is turning negative all over, but the spike has been unwound in many crosses.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – US Chicago Fed National Activity Index
  • 1300 – ECB President Lagarde to speak
  • 1400 – US Fed’s Collins (Voter this year) to speak
  • 1430 – ECB’s Centeno to speak
  • 1600 – US Fed’s Bostic (non-Voter) to speak
  • 1600 – UK Bank of England’s Tenreyro to speak
  • 1835 – New Zealand RBNZ Governor Orr to speak
  • 2000 – US Fed’s Mester (Voter) to speak

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Saxo Capital Markets (Australia) Limited 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 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


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) Limited 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, Product Disclosure Statement and Target Market Determination 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. 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. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

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.