FX Update: GBP beating a retreat, USD pressing its case

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  The USD has pressed beyond resistance levels in a select few G10 pairings, but the big ones are holdouts, especially EURUSD as we await the ECB meeting on Thursday and whether Lagarde and company can move the needle. Elsewhere, sterling is finally showing a more determined weakening on Brexit concerns as BoJo takes an aggressive line in negotiations.


Trading focus:

The USD has strengthened beyond the tipping point, if only selectively:

USDCHF is above local resistance and facing down a big level, GBPUSD has reversed, but still waiting for signals from EURUSD and AUDUSD.

The US was off-line yesterday for Labor Day holiday, but US President Trump took the opportunity to bash China at a press conference and make it clear that a profound anti-China stance will be a major part of his re-election platform. He brought up the idea of a “decoupling” of the two nations’ economies, threatened to cut access to federal spending for companies outsourcing jobs to China and promised to end the US “reliance” on China.

As for the US dollar, the recent volatility in US stocks failed to feed notable safe haven flows into the US dollar, although the greenback has bounced solidly from last week’s lows, and is challenging above resistance in select places. As long as equity volatility remains isolated to the US market, the transmission or contagion into FX and support for the USD could remain weak. That’s what we have seen so far as European and other equity indices are still completely bogged down in narrow ranges established over the summer.

Chart: USDCHF
Normally we don’t pull USDCHF out of the chart bag often as the lack of volatility in EURCHF means there is little reason to focus on the pair relative to EURUSD. But USDCHF has been a popular vehicle of speculation for USD bears and bounced very strongly after hitting the round 0.9000 level. With EURCHF also behaving oddly and pressing its case near the top of the range, this means that USDCHF has already spilled higher relative to the local range and is now up challenging the major cycle low from March just below 0.9200.

Source: Saxo Group

GBP – shaky in the knees on BoJo’s aggressive stance

GBPUSD has capitulated and could accelerate as GBP fear levels are still quite low

Sterling is slowly waking up to the risk of another cycle of “no deal” fears as Boris Johnson has taken a hyper-aggressive turn in drawing up possible plans to renege on the very terms that made the Brexit deal possible in the first place, and vowing that October 15 is a negotiation deadline. bUt don’t take my word for it - Bloomberg’s normally very balanced John Authers calls Boris Johnson’s moves “crazy” and “downright stupid”. In reaction to this latest turn, sterling is beginning to absorb the implications but pricing still looks complacent here relative to the risks, perhaps as all of the previous “cliff edge” situations were avoided and the market believes this one will be too, fairly or not.

Chart: GBPUSD
GBPUSD has reversed back lower with this move below 1.3200-50 again and the price action is opening up toward 1.30000 and even the major 1.2750 area noted in the chart below if the market finally starts to price in proper no-deal risk from these negotiations rather than complacently assuming that Boris Johnson is merely posturing here.

Source: Saxo Group

The G-10 rundown

USD – the US dollar is at the tipping point. As we argue above, we haven’t seen true broad risk sentiment weakness yet, which is the likely ingredient needed to get a more major consolidation going to the upside for the greenback. This looks a bit overdue anyway as we have long opined that the animal spirits need to respect the import of the upcoming US election uncertainty.

EUR – expecting maximum dovish signaling from the ECB this week, but the ECB’s tools are faced with diminishing returns unless they innovate with something unexpected. Consolidation risk lower for EURUSD is my preferred scenario – something like maintaining a 1.1500-1.2000 range ahead of the US election?

JPY – the US treasury auctions this week and the implications for US yields after Friday’s big uptick in yields are likely critical, together with risk sentiment developments here after last week’s gyrations. Expecting directional correlation between the USD and JPY in the crosses.

GBP – as noted above, the market has been caught sleeping by the latest turn and there could be plenty more GBP weakness to come here without a sudden turn for the better.

CHF – CHF is not behaving according to the playbook and there is nothing to explain its recent weakening in the news flow. My stab in the dark is merely that this is a squeeze on USDCHF short positioning, but we’ll need to set the bloodhounds on the trail to explain what is going on if EURCHF springs above 1.0900 and maintains above that level post-ECB meeting.

AUD – the lack of volatility in AUD given the ratcheting higher of US-China risks is rather remarkable as traders perhaps have their complacent eyes on the lack of broader risk sentiment moves of late and still elevated key commodities prices supporting Australia’s mining industry.

CAD – plenty more room for consolidation higher in USDCAD back toward 1.3300-50 on late oil weakness and any further risk sentiment wobble.

NZD - AUDNZD founds support in the key zone as RBNZ likely readies negative policy rate regime. NZDUSD is on the verge of a capitulation lower if it takes out the 0.6625-00 zone.

SEK – the price action has been moribund as the prior down trend lost all energy in recent weeks – risk off continuation here points to the risk of a consolidation back to 10.50-55.

NOK – the recent rejection of new lows in EURNOK points to a squeeze risk higher as weak oil prices are already pressuring NOK badly, a situation that could intensify if a broad risk aversion wave washes over markets here.

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