USD rally pauses, sterling slide continues USD rally pauses, sterling slide continues USD rally pauses, sterling slide continues

USD rally pauses, sterling slide continues

Forex
John Hardy

Head of FX Strategy

The euro notched a new low for the cycle versus the US dollar within a few pips of the 38.2% retracement level of the entire rally sequence from the 2017 low below 1.0400 to the 1.2500+ high. This came even as EU peripheral spreads rushed wider, with the Germany-Italy spread trading close to 190 basis points versus the multi-year low of below 115 bps (on April 24 – hard to fathom).

Looking at the euro crosses, the strong USD remains as much a driver as the weak euro in the EURUSD action of late, although EUR/commodity currencies have adjusted considerably lower as well.

Markets opened the week yesterday in a rather positive mood as the US and China are now busy at the negotiating table rather than trading tariff threats. China’s promise to buy more US goods and services is likely the chief factor in easing the trade war-linked anxieties. Still, the trade issue remain capable of producing uncomfortable headlines on multiple fronts at any time. One of the key benefactors has been the China-sensitive Aussie, which got a strong boost yesterday and is two weeks removed from its low versus the USD. The AUDUSD pair is working into pivotal levels as the important resistance zone has come into view in the 0.7600-50 area. 

Emerging markets saw some relief yesterday as risk appetite improved, USD strength eased, and US long rates did likewise. The latter three developments are the critical ones for EM trades and the pivotal level for the US 10-year yield benchmark remains close by in the 3.00-3.05% region. 

Despite the euro’s woes, sterling managed to underperform even the euro yesterday as the market judges the Brexit uncertainty as sufficiently sustained to cast a long shadow over the currency. GBPUSD has suffered a notable technical breakdown (see chart below) and could be attracting flows even as EURGBP is bottled up in a range. The data calendar is heavy this week for the UK, with the latest CPI and other inflation measures for April up tomorrow, Retail Sales on Thursday and a Q1 GDP estimate set for Friday. BoE officials are out speaking today, including Carney himself, as the market has shifted rate hike expectations back to August, and after pricing May hike odds as high as 90% in recent months, the August hike odds are only a bit above 50/50.

Chart: GBPUSD

Sterling has crumbled badly versus the greenback after reaching the 1.4300+ area on the anticipation of rate normalisation from the Bank of England. Ongoing Brexit uncertain and bad data stumbles have pushed the number and pace of BoE rate hikes lower. The pair has crumbled through a key pivot zone around 1.3500 – a major level that provided support during the global financial crisis and was a key resistance zone on the way back up from the post-Brexit cellar.

We can see that the actual recent support was the 38.2% Fibonacci of the post-Brexit rally sequence and that the failure of this area could point to the next major Fibo down near 1.2900 if the USD rally continues for a spell and sterling remains sidelined by uncertainty.

GBPUSD

Elsewhere, the Hungarian central bank announces rates today. The bank hasn’t moved the policy rate since executing its final cut to the current 0.90% level back in early 2016. The bank is not expected to make a policy shift at this meeting, but the situation is far more interesting here for the bank than it has been in a very long time, given EURHUF’s rise to the top of a multi-year range in the 315-320 area.

Interesting to watch the degree of contagion into CEE from the recent EU woes given the clear political divide. Germany-Hungary 10-year yields have widened back to levels from last fall after trading 100 bps tighter than they are at present near the start of this year.
 
The G-10 rundown

USD – likely key to see US rates picking back up before the 10-year benchmark threatens the pivotal 3.00% area to continue to support a USD rally. Federal Open Market Committee minutes up tomorrow could be the next event risk test for the rally.

EUR – watching peripheral spreads and headline risks from Italy as the populist government appears to have its prime minister (an unknown quantity). US futures positioning reports suggest a very tardy response to the situation in Europe, as the speculative long position has remained very large (as of last Tuesday when the latest weekly report was generated) through the large correction in EURUSD.

JPY – the JPY likely to stay weak if US yields rise again with no collateral damage to risk appetite. The picture gets more confusing for JPY traders if rates are up and risk is down. Surprised that EURJPY hasn’t suffered more through this recent episode of EU existential worries...

GBP – sterling remains in the doghouse, even lower yesterday against the euro as the next round of Brexit talks is set to get under way today. As noted above, the UK data calendar is rather heavy through the rest of the week as well.

CHF – EURCHF clearly absorbing some safe-haven flows as EU peripheral spreads have widened and could continue to act as the proxy of EU existential pain once again, though the SNB may be happy to step in at any time.

AUD – Aussie has been the strongest currency in the G10 over the last two weeks – hard to believe this is set to continue without a more compelling catalyst.

CAD – oil prices still near the highs perhaps helping to steer USDCAD back lower after the reaction to weak Canada data on Friday. 1.2700-50 area is the key tactical pivot for the very directionless USDCAD chart.

NZD – low expectations for the kiwi relative to global peers – but major weakness might require a specific data or central bank catalyst or an ugly decline in risk appetite.

SEK – SEK achieves a new leg of strength versus the struggling single currency and EURSEK could be set for a test of the ultimate structural pivot area into 10.00.

NOK – EURNOK finally having a look at the key downside break area below 9.50 – surely NOK can managed a decent leg up against the single currency here as long as risk appetite is stable and oil prices highs amidst all of the EU existential pain?
 
Upcoming Economic Calendar Highlights (all times GMT)

   • 0730 – Sweden Apr. Unemployment Rate
   • 0815 – UK Bank of England’s Carney and others speak
   • 1200 – Hungary Rate Announcement
   • 1400 – US May Richmond Fed Manufacturing

Disclaimer

The Saxo 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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.