pound sterling pound sterling pound sterling

USD edges lower, sterling eyes Brexit summit

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US dollar has weakened to pivotal levels in places ahead of this week’s key US-event risks tomorrow – the March CPI data and FOMC minutes. Elsewhere, sterling traders are reluctant to drive price action in either direction but may finally get an excuse to do so in the wake of tomorrow’s Brexit summit.


Another day of local new highs for the equity market and extremely low volatility in FX, though with a detectable and broad weakening of the US dollar, a weakening now of sufficient degree to potentially register minor breakouts in AUDUSD and USDCAD if the action persists.

The narrative has switched to optimism on global growth in the absence of policy tightening – i.e., that  the Fed will be happy to remain “patient” and not indicate any intent to hike rates if the outlook remains positive and even if inflation picks up again, given the discussion of a “symmetric” inflation targeting (allowing inflation to run hot for a time to compensate ).

To really encourage this narrative, as discussed yesterday, we need to see the long end  of the US yield curve pulling back higher without risk sentiment running for cover at the implications – so the 2.50-2.60% zone in the US 10-year  benchmark is our pivot  zone for judging whether this theme could have legs and drive a notable extension of the risk sentiment rally, leading to further commodity dollar, Scandie and EM strength.

An important day ahead for the Brexit outcome as the crunch summit could see the announcement of a long extension of the Article 50 deadline by nine or even twelve months. Theresa May wants a June 30 extension, but the UK parliament can overrule her today. Then tomorrow we have to consider what concession the EU side extracts for granting the delay.

A second referendum? That’s a risky gambit, but punting the responsibility back to the people may prove the only possible course through the political logjam. Even assuming we avoid all cliff edge scenarios, will parliament feel it has the authority to assume that the people’s vote means it can cancel Brexit or agree to a soft Brexit with the UK permanently locked into the EU customs union?

Trading interest

Long AUDNZD on dips for 1.0700+, stops below 1.0450
Watching for how the US dollar trades after tomorrow’s key event risks for positioning bias

Chart: AUDUSD

AUDUSD up having a look at a new 20+ day high close today, driven by support from key commodities like iron ore and even gold (recent record posted in AUD terms) and hopes that the global growth outlook is turning more positive again. The chief factor holding the Aussie back is the concern on the domestic housing front, where housing prices and construction activity have been in a freefall in recent months.

Looking higher, there is considerable work to do for the bulls to argue that an uptrend is forming – a solid close above the  200-day moving average and eventual follow through above 0.7350-0.7400 look awfully far away when we’ve been trading in a highly constricted trading range for the last 6-7 months and still await a US-China trade deal, which is still some weeks away according to the latest management of expectations late last week.
Source: Saxo Bank
The G10 rundown

USD – the weakness getting sufficiently pronounced in places now to require attention – first pairs to threaten a larger move  look like AUDUSD and USDCAD. Tomorrow’s US inflation data and Federal Open Market Committee minutes the possible deciders. (Still – look at how profoundly stuck we remain here after the hugely dovish March 21 dovish FOMC  surprise.

EUR – some encouragement that the Eurozone growth slowdown is easing or turning the corner would be helpful and drive a solid rally in EURCHF and EURUSD. German 10-year Bund yields back at the pivotal 0 bps level.

JPY – if the USD is weak with a positive risk backdrop, the JPY may show little beta versus the US dollar as the market indulges in short JPY carry trades.

GBP – sterling going nowhere until we get clarity, and if becomes clear that we’ll suffer a further significant wait for the Brexit outcome, this could weigh on sterling across the board.

CHF – EURCHF looking higher, but needs to pull back above 1.1300 to argue for the end of the downside threat.

AUD – note AUDUSD discussion above. AUD is poised to benefit from any deepening hopes that a Chinese and global growth recovery are afoot.
CAD – USDCAD wilting into the first downside pivot area at 1.3300 – the US yield direction we discuss above and the USD status after tomorrow’s US event risks the next test for the pair. 

NZD – the kiwi rather firmly under the Aussie’s thumb as AUDNZD may have turned the corner for the cycle. NZDUSD, meanwhile, eyeing the range lows and 200-day moving average in the 0.6725 area ahead of the week’s key USD-linked event risks tomorrow.

SEK – we’ll say it again – EURSEK should be lower given the backdrop – is the market simply not paying attention or is there opportunity here? A close below 10.40 needed to set the ball in motion.

NOK – ditto SEK comments, particularly given the move in Brent crude above 70 dollars/barrel.

Upcoming Economic Calendar Highlights (all times GMT)

1000 – US Mar. NFIB Small Business Optimism
1300 – Mexico Mar. CPI
2100 – US Fed’s Quarles (Voter) to speak
2245 – US Fed’s Clarida (Voter) to speak
 

Disclaimer

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 (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
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.

©   since 1992