GBP: Why Have the Breakouts Lacked Momentum?

Posted on

Daily FX Market Roundup 04-28-14

GBP: Why Have the Breakouts Lacked Momentum?

Rebound in U.S. Yields Breathes Life into USD/JPY

Will EUR Buckle Under German CPI?

NZD Approaches Key Support at 85 Cents

AUD Approaches Key Support at 92 Cents

CAD: Oil Rebounds, Gold Slides

JPY: Rush to Spend Before Tax Increase

GBP: Why Have the Breakouts Lacked Momentum?

Over the past month, sterling climbed to fresh 4-year highs against the U.S. dollar on many occasions but each time the rally fizzled no more than 20 pips beyond previous levels. There’s been no momentum behind the breakouts and yet at the same time sterling refuses to fall, leaving investors confused about whether GBP/USD is in the process of topping out or consolidating before a significant breakout. We know that speculators are positioned for a major upside move in the currency pair but extremely stretched long positions means there are fewer buyers left in the market. In order for sterling to propel higher, the U.K. needs to report not just good but great economic data that could potentially force the Bank of England to rethink their steady monetary policy. Overstretched positioning is problem for sterling but at the end of the day the central bank’s relaxed attitude and the strong likelihood of major stops above current levels are all valid reasons why there’s been no momentum behind the breakouts. At the same time, there’s always a risk of weaker economic data and that has kept GBP/USD below 1.6900. U.K. first quarter GDP numbers are scheduled for release tomorrow and while economists are looking for a pickup in growth, a significant slowdown in retail sales means there could be a downside surprise that would the currency pair’s 1.6786 support level at risk. Until investors are confident that there will only be upside surprises in U.K. data, GBP/USD may struggle with each attempted breakout.

Rebound in U.S. Yields Breathes Life into USD/JPY

This is a busy week for the U.S. dollar but there was very little consistency in the greenback’s performance today. The dollar strengthened against the Japanese Yen but weakened versus the euro and British pound. Part of the divergence had to do with the surprise reversal in U.S. equities caused by reports that Russian troops will be leaving the Ukraine border and returning back to their base. It remains to be seen whether Russia’s actions represented a real attempt by Putin to ease tensions or an attempt to regroup for a stronger response to new sanctions. Either way, risk assets have benefited from the news and some more than others. At the same time, the rebound in U.S. yields provided underlying support to USD/JPY. Pending home sales rose more than expected in March but as one of the least market moving pieces of U.S. data on this week’s calendar, the report had very little impact on the greenback. Instead, the focus will be on first quarter GDP, the FOMC rate decision and non-farm payrolls. Trading ranges for certain currency pairs such as the GBP/USD are beginning to expand with more to follow. While the dollar will stir from its coma this week we don’t expect any major breakouts. GDP is a stale and backwards looking release, Janet Yellen does not have a press conference scheduled after this month’s FOMC meeting and non-farm payrolls will rise at a slow and steady pace. The Federal Reserve is widely expected to taper asset purchases by another $10 billion this month. Given recent economic reports, there’s no reason for the central bank to accelerate or slow the unwinding of Quantitative Easing meaning that the chance of a surprise is slim. For yields to permanently reverse course, the FOMC statement would need to be more hawkish and/or the unemployment rate would need to decline to 6.5% or better.

Will EUR Buckle Under German CPI?

Euro responded positively to the news that Russia decided to recall its troops back to their bases from the Ukraine border. What is interesting is that while the euro hasn’t suffered from increased tension, it is benefitting from the improvement. Based on this morning’s German import price report, low inflation is becoming a bigger headache for the European Central Bank. Prices declined 0.6% in the month of March, driving down the annualized pace of import price growth to -3.3% from -2.7%. This release is not closely followed but it raises concerns for tomorrow’s consumer price report. After rising for 2 straight months, German CPI is expected to fall 0.1% in the month of March. Given that low inflation was the motivation for the last rate cut by the ECB, if CPI falls more than 0.1%, it could stall euro’s rally. While the central bank is not overly concerned about deflation they are worried that inflation is too low, posing a threat to consumer spending, business profits and investment. This explains why European policymakers continue to express their willingness to use unconventional measures to fight low inflation including Quantitative Easing but according to a source close to the ECB, this is one of their least palatable options. Aside from German CPI, Eurozone confidence numbers are also scheduled for release on Tuesday and after the rise in the German IFO report and PMIs, economists are looking for a small improvement.

NZD Approaches Key Support at 85 Cents

The Australian and New Zealand dollars had a difficult start to a busy trading week. Despite the lack of economic data, both currencies resumed their slide as U.S. yields increased and gold prices declined. Alone, none of the movements in other markets were significant enough to drive AUD and NZD lower but collectively, they erased earlier gains in the AUD and compounded the losses in NZD. Both currencies are approaching important support levels with 92 cents being the key level to watch for AUD/USD and 85 cents for NZD/USD. The short-term top in AUD/USD was set by softer CPI growth while NZD/USD peaked after the RBNZ rate decision. This week’s Australian and New Zealand economic reports are not significant enough to trigger a big reaction in either currency but could nonetheless affect whether support is broken. With the momentum skewed to the downside, we expect the key levels to be tested this week. Meanwhile a rebound in oil prices helped to drive the Canadian dollar slightly higher against the greenback. No economic reports are expected from Australia or Canada over the next 24 hours but trade data is scheduled for release from New Zealand this evening and a significant improvement is expected. However if the data surprises to the downside and it could given the drop in commodity prices, NZD/USD could make a run for support at 85 cents.

JPY: Rush to Spend Before Tax Increase

For the first time in 4 trading days, the U.S. dollar ended the North American trading session higher against Japanese Yen. Stronger pending home sales and a rise in U.S. yields helped to lift the currency pair on a day of weakness in Japanese equities. Investors for the most part ignored the improvement in consumer spending last night. Retail sales rose 6.3% in the month March, which was not only stronger than expected but also the fastest pace of growth in 17 years. In a normal market environment Japanese assets would have responded extremely well to the release but spending only increased because the sales tax was set to rise from 5% to 8% on April 1st. As a result, traders discounted the news knowing that there is a good chance spending would decline in April. The big question is how much demand will slow – the Bank of Japan is optimistic that rising wages would help to the offset the pain and if 1997 can be guide, the pullback in spending may not be as significant as some fear. When the central bank last raised taxes, spending fell 3.8% in April 1997 after rising 12.4% in March. Of course, Japan later fell into recession but that could have been attributed to the specific market environment and the Asian Financial Crisis. Either way, investors will most likely take March economic reports in stride.

Kathy Lien
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *