With U.S. markets closed for Presidents Day, we look forward to a very quiet North American trading session. In fact, volatility should compress and grind to a halt after European markets close at 12pm NY Time. The only notable move that we had in the foreign exchange market over the past 24 hours is in the British pound, which climbed to a fresh 4 year high against the U.S. dollar at the start of the Asian trading session. While there may be plenty of fundamental reasons for us to believe that sterling will strengthen this week, we can’t ignore the intraday reversals in EUR/USD and GBP/USD. Both currency pairs extended their gains during the Asian trading session but the rallies fizzled in Europe. The reversals were not caused by economic data and the 1% rise in the FTSE should have driven GBP/USD higher but the currency pair ran into a wall of profit taking above 1.68 and now appears vulnerable for a move back down to 1.66.
At the same time there has been very little consistency in the performance of the dollar this morning. The greenback is trading higher against the Japanese Yen and British pound, lower against the euro and Canadian dollar and unchanged versus the Swiss Franc, Australian and New Zealand dollars. We believe that the dollar could move lower as the week progresses, particularly against the British pound. Recent economic reports have shown the amount of damage that the brutal winter weather is having on the U.S. economy and since we still haven’t gotten past the January and February releases, there could be more downside surprises that could weigh on the greenback.
In contrast, most of the U.K. economic reports that are scheduled for release should surprise to the upside. Tomorrow’s inflation report may be softer but employment and retail sales should have improved in the month of January. The momentum in the British pound was triggered by the latest BoE Inflation Report, in which the central bank abandoned its unemployment rate threshold and significantly upgraded its 2014 GDP forecasts. As the year has just begun, they probably wouldn’t have made these changes so quickly if the economy weren’t gaining momentum. Therefore not only do we expect a tinge of hawkishness from the BoE minutes, but we are also looking for some healthy economic reports. The momentum in sterling is to the upside and we have every reason to believe that this trend will continue. There is no major resistance in the GBP/USD until 1.70. The currency pair could drop to 1.6650 on the back of weaker CPI but we will view this move as an opportunity to buy at lower levels.
Tonight’s Bank of Japan monetary policy announcement should be a nonevent for the Japanese Yen because no changes are expected. The minutes from the last Reserve Bank of Australia meeting on the other hand could drive the Australian dollar higher. Earlier this month, the RBA dropped its bias to ease and the minutes could provide a deeper explanation of their reasoning for doing so.
**Since we will be speaking at the NY Traders Expo, the next update will be Wednesday.