FX Trading focus: We have neutralized the GBP wipeout and a central bank pivot narrative has partially broken out. Now what?
Not much to add in today’s observations as yesterday saw an aggressive extension of trades aligning along the risk sentiment axis, particularly the US dollar lower, if mostly only against the European currencies. The lack of more pronounced breadth in the weakening greenback may be down to long US yields stabilizing ahead of the key 3.50% area in 10-year US treasury yield, but also down to the fact that the UK was at the center of the recent aggravated ramp up in the USD as treasury yields spiked. As well, positive news for Ukraine and softer natural gas prices in Europe are likely additional drivers for improved European FX sentiment. With GBPUSD trading back almost as high as 1.1500 this morning, the approximate kick-off area from where the UK gilt market melted down and took sterling with it starting after the September 22 Bank of England meeting, we now have to ask ourselves if there is more sustenance for a continuation of the move. Barring actual signals of a pivot from the Fed and/or energy and power prices in Europe dropping significantly further due to an actual visibility emerging on the longer term shape of Russian supplies, the answer is most likely “no”.
Of course, a big miss in the September US ISM Services survey today (expected at 56.0 vs. 56.9 in August) and/or a bad miss on payrolls and earnings in the Friday US September jobs report could drive an extension of the “central bank pivot” narrative in the near term, with the US dollar on its back foot. But weaker global growth is no boon to risk sentiment at some point beyond the immediate relief from a cessation in the seemingly inexorable rise in yields.
Parity in EURUSD an obvious psychological resistance line and was also the big, sticky round level that the exchange rate hugged for several weeks before the excursion to below 0.9600 that was mostly about the contagion (into a strong USD) from the sterling meltdown that was a traumatic liquidity event in the wake of the Bank of England meeting and the subsequent, deficits-be-damned moves by UK Chancellor Kwarteng. We are more or less back to square one, with the added narrative twist of a central bank pivot as noted above. Uniformly weak US data through Friday could drive an extension higher, but even a move to 1.0200+ may simply represent a larger scale consolidation within the massive downtrend, even if the downward channel denoted on the chart would be disrupted. A strong batch of US data and significant pull back higher in US yields would likely cap the action for now, although it will take some considerable work to get the downtrend back on track after this sharp back-up.