background image background image background image

A nervous week ahead, especially for sterling

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  The very weak close in equity markets on Friday after a solid comeback attempt the prior day sets up a nervous week ahead. The USD is caught in the crossfire of opposing themes as we await developments in the testy US-China relationship and sterling traders hold their collective breath for the next twists and turns in the fate of Brexit.

Friday’s ugly close in equity markets not far from the cycle lows and the US 10-year benchmark closing the week well below the pivotal 3.00% level sets up a very nervous week ahead. Arguably, the latest dip in sentiment has been driven by the arrest in Canada of Huawei’s CFO and concern that this spirals into a wider showdown and derails the ongoing US-China trade negotiations. Headlines linked to this story could drive significant short-term volatility in either direction.

The odds of a December 19 Fed rate hike dipped very slight, but remain close to 70% after Friday’s US jobs report for November, which saw a disappointing month-on-month rise in average hourly earnings of +0.2%, even as the year-on-year number was in-line and matched October’s cycle high. Also negative, if not yet statistically significant, the average weekly hours worked dipped unexpectedly and the payrolls change for the month also disappointed. More relevant as a historic indicator, the recent rise in the weekly jobless claims off record lows is beginning to look persistent and has been a better indicator of the state of the US jobs market historically. This number, released every Thursday, could begin to take on more importance.

The US dollar is caught in a crossfire of conflicting drivers, as the unwinding of Fed expectations is bearish, while weak risk sentiment drives a safe haven bid.

Canada’s erratic employment change number printed at a record high on Friday, catching fresh CAD shorts off-guard after a profound shift in the Bank of Canada’s guidance last week. Given the tendency of this data series to mean revert and the fact that employment data is one of the most lagging economic time series, we would pay far more attention to the Bank of Canada’s guidance than an unreliable and lagging indicator.

Besides risk-on, risk-off risks this week, especially if the major US stock indices dip to new cycle lows, the Brexit issue will continue to drive uncertainty in GBP and even EUR. The noise this morning is that May will look to delay the parliamentary vote and is begging the EU for a “lifeline” to provide a breakthrough. But nothing resembling the current deal is likely to pass the UK parliament, which will call the EU’s bluff that it is either May’s deal or No Deal. The EU is not willing to let the economy go down in flames just ahead of the May 2019 EU parliamentary elections. The situation will remain very fluid for now.

Chart: EURGBP 3-month volatility

As the Brexit window draws to a close, implied volatility in sterling crosses is spiking to the levels just before and after the actual Brexit vote back in 2016. The chart below shows the 3-month implied volatility, which doesn’t even take us to after the March 29 Article 50 deadline. Arguably, volatility could be too expensive and taking a directional view on sterling in the options is getting very pricey. One approach could be to trade long call or put spreads, which limits upside, but requires less of a move to realise a profit.

Source: Bloomberg

The G-10 rundown

USD – as discussed above, unwinding of Fed rate hike expectations out the curve only help to weaken the US dollar when the market celebrates the unwinding with stronger risk sentiment. This week’s CPI (Wednesday) and Retail Sales (Friday) are the last major US data points ahead of next Wednesday’s Federal Open Market Committee meeting. 

EUR – the euro rising within the range short of 1.1500 in EURUSD, but we have a hard time seeing a pointed directional move in euro until something firmer develops on Brexit. 

JPY – the JPY can’t seem to sustain a rally, only pulling higher when risk off is afoot and then dribbling back to the downside when the pressure eases. USDJPY hasn’t made a technical statement in over two months.

GBP – don’t let the low volatility in spot EURGBP, for example, fool you, as the market is sitting on its hands, but very nervous on where this goes next – as indicated in the implied volatility in the options market shown above.

CHF – paint is drying in EURCHF, but potential for a reaction on Brexit developments, although curiously, implied volatilities are still muted.

AUD – Any bounce in AUD may prove modest unless we see a sudden positive spin on US-China negotiations after the downward shift in Reserve Bank of Australia expectations. 

CAD – as indicated above, the Bank of Canada guidance shift and removal of forward rate hike anticipation speaks louder than a strong jobs report Friday. We prefer outlook for USDCAD toward 1.3800 as long as we hold above 1.3200-1.3300.

NZD – the Reserve Bank of New Zealand’s Orr out speaking late tomorrow and have to wonder if he is beginning to get a bit uncomfortable with the kiwi’s relative strength. Given weak risk appetite backdrop, the strong kiwi of late sticks out like a sore thumb.

SEK – is SEK catching the weak housing market bug started by AUD and CAD? Quite possibly, as EURSEK pops back up into the range and could be in for a further squeeze if 9.35. Still, short rates remain firm going into next Thursday’s Riksbank meeting. 

NOK – OPEC plus Russia agree to cut 1.2 million barrels, with Russia apparently to take considerable time to achieve its cuts. Meanwhile, US shale oil production has ramped over 3 million barrels per day over the last two years and the US has become a net oil exporter – not convinced, in other words, that oil about to provide a strong bid under NOK.

Upcoming Economic Calendar Highlights (all times GMT)

0900 – Italy Oct. Industrial Production
0930 – UK Oct. Visible Trade Balance
0930 – UK Oct. Manufacturing Production
1315 – Canada Nov. Housing Starts
1330 – Canada Oct. Building Permits


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.