FX Update: Sterling found resistance. Geopolitics drive fresh unease. FX Update: Sterling found resistance. Geopolitics drive fresh unease. FX Update: Sterling found resistance. Geopolitics drive fresh unease.

FX Update: Sterling found resistance. Geopolitics drive fresh unease.

John Hardy

Head of FX Strategy

Summary:  We have quite a cocktail of market drivers today, with end-of-month and end-of-quarter in play, coming just after the trauma this week induced by the meltdown in the UK gilt market and the subsequent stabilization of that and other sovereign bond markets by the BoE’s emergency operation. But we also have fresh bad nerves in risk sentiment as other financial conditions indicators flash red and with a very uncomfortable geopolitical backdrop in Europe, as most clearly expressed in weak CEE currencies.

FX Trading focus: Sterling went full circle, market sentiment risks deteriorating again despite bond market stabilization

Sterling traded to 1.1200 overnight before dipping sharply and then rising to back above 1.1200 briefly in the European morning session today on hopes that a meeting today between UK PM Truss and Chancellor Kwarteng and the Office of Budget Responsibility chief will result in the Truss government rolling back some of the recent measures that unsettled market confidence in UK gilts. The political pressure is certainly mounting after the latest YouGov poll showed Labour with a 33-point lead in the polls, the widest margin since the 1990’s. With 20/20 hindsight, it is easy to see that the gilt wipeout saw significant contagion into other bond markets and that the stabilization of yields has likewise been global in scope. Interestingly, despite yesterday’s very weak risk sentiment that erased the prior day’s “risk-on”, the US dollar remained weak, apparently as the focus is more on treasury yields? That USD weakness has in turn faded and I gave a hard time seeing renewed broad USD weakness as long as financial conditions (outside of sovereign bond markets, which so quickly become existential) continue to deteriorate: for example, with fresh lows for equities and as high yield credit spreads are now back near the cycle highs from early July in the US. Practically speaking, the big EURUSD pair would have to reverse back above 0.9900-0.9950 to revisit that view. In the early European afternoon, we are already trading a figure back below the 0.9850 highs of the last session.

Germany has declared a €200 billion package to save its consumers and industry from high natural gas and power prices, to be funded from pandemic funds. This is simply absorbing the current pain onto the sovereign balance sheet in order to keep significant portions of the economy from being wound down. It’s ironically a kind of demand support akin to what pandemic spending did, at a time when the currency needs for energy prices to fall for support. Especially as long as the Fed fails to ease, external deficits from subsidized energy plans will continue to wear on the euro and the pound. These measures will only prove wise in the long run if the high energy prices are transitory on a scale of a few months. If the situation fails to ease very significantly next spring and summer and we fail to see the prospect of a longer term return of low energy prices, these subsidies will be a disaster for the currency and for the public balance sheet.

Sterling has come full circle since the vicious sell-off was initiated near 1.1200 late last week in GBPUSD in the wake of the tax cut announcements that seemed to serve as the final straw for sterling, as gilts were already under vicious pressure, in part from the lackadaisical pace of Bank of England tightening. Alas, the BoE rescue has helped stabilize not only the local bond market, but also global sovereign bond markets, which continued to find support even as risk sentiment generally reversed yesterday… suggesting if risk sentiment worsens, it may have more to do with financial conditions elsewhere as discussed above. Judging from today’s price action, the 1.1200-1.1250 area looks the tactical upside pivot zone and 1.1500 the last area of price stability higher and the larger kick-off point of the down-wave. Looking lower, the 1.0800 area is the next import zone of price congestion

Source: Saxo Group

The sabotage of the Nord Stream pipelines and threats from Russian leader Putin on the consequences of attacking “Russian sovereign territory” now that he is set to declare the occupied portions of Ukraine as Russian territory are weighing on market sentiment. The clearest expression of this has been in the CEE currencies, with EURHUF to fresh records above 4.20 today and EURPLN back at levels that only traded briefly around the invasion of Ukraine by Russian forces. Putin will speak shortly after pixel time for this article and trades may find it uncomfortable to hold positions ahead of the weekend on belligerent rhetoric, not only in CEE currencies, but in nearly anything that trades on the riskier end of the risk appetite spectrum.

Meanwhile, next week’s data calendar offers an interesting test for the US dollar with the ISM’s up Monday and Wednesday and the US September jobs report up on Friday. A very strong weekly claims data point below 200k emphasizes the strongly improving trend there. Shortly put, Fed QT and tightening in general is far more likely to break markets well before the US economy hits the skids. The BoE and sterling were merely victim #1 (or #2 if we look at the JPY….that story still smoldering in the background).

Table: FX Board of G10 and CNH trend evolution and strength.
The USD springing back today from lows overnight – important test next week on macro data and along risk sentiment axis. Interesting to see the JPY not getting more notable support despite the late yield drop. NOK likely doesn’t like the idea of energy price caps as per today’s big German plan to cap prices. Norway will likely eventually be asked to play its part in controlling prices.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
NOKSEK in a profound downward move now, following through on the 1.0500 break. Interesting relative strength battle in EURJPY after the comeback attempt in European currencies. Should JPY not win if global yields continue to drop here? Also watching 1,680-1,700 area in spot gold (XAUUSD) as gold is doing quite well on risk-off that is not driven by a fresh spike in yields.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1230 – US Aug. PCE Deflator/Core Deflator
  • 1300 – US Fed Vice Chair Brainard to speak at Fed conference on Financial Stability.
  • 1345 – US Sep. Chicago PMI
  • 1400 – US Final University of Michigan Sentiment

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 is not intended to and does not change or expand on this. 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. 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

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.