GBP – You Should be Trading it This Week

Daily FX Market Roundup 09.12.16

If you are looking for volatility, sterling is the currency to trade this week. U.K. inflation, employment and retail sales numbers are scheduled for release on top of the Bank of England’s monetary policy decision. Alone, each of these economic reports could spark big moves in the currency but collectively we can be assured of wild swings for sterling. Of all the major currencies, the U.K. has the most significant and market moving economic reports scheduled for release starting with inflation on Tuesday. Driven by the weak sterling, consumer and Producer prices are expected to rise strongly in the month of August. If you recall in their Quarterly Inflation Report, the Bank of England raised its CPI forecast. They now see reaching their 2% price target in Q4 of 2017 instead of Q2 of 2018. The weaker currency also brought tourists to the U.K. for shopping sprees – the Chinese Yuan is at its strongest level versus sterling in more than 2 decades. So while the British Retail Consortium reported lower shop prices and sales, foreign consumption may offset the difference. Labor market conditions should also be relatively healthy with the manufacturing, services and construction sectors reporting stronger job growth in August. The only area of caution is wages, which grew at a faster pace in June and could slow in July. Of course the Bank of England’s guidance could also go either way but we expect sterling to trade higher in the front of the week. Today’s rally in GBP/USD shows that other investors share our view but the greatest gains for sterling should be seen against other currencies like the euro and Australian dollars.

The U.S. dollar traded lower against most of the major currencies today after FOMC voter Lael Brainard casted doubt on a rate hike this month/year.
Investors hoped that she would flip from a dove to a hawk like her peer Fed President Rosengren but instead she urged “continued prudence in removing accommodation,” citing weak external demand and the possibility of a hike halting further labor market gains. Brainard felt that policy should guard against the downside and argued that the case for tightening preemptively is less compelling. While she sees the economy continuing towards full employment and notes progress being made on the Fed’s goals, its clear that she won’t support a September rate hike. Fed Presidents Kashkari and Lockhart spoke earlier and their views underscore the division within the central bank. Kashkari expressed concerns about inflation coming up a bit short while Lockhart said economic conditions warrant serious discussion of a hike. Between Fed voters Brainard and Tarullo’s recent comments we don’t believe there’s enough consensus for a rate hike next week and for this reason we expect the dollar to slip further in the coming days. Today’s sell-off has taken USD/JPY to the 20-day SMA but from a technical and fundamental perspective, we expect USD/JPY to test its September lows and USD/CHF to drop to 0.9650.

With no major Eurozone economic reports released today, the EUR/USD was confined in a narrow 60 pip trading range. The bounce off the lows was driven by the intraday recovery in U.S. equities but the move has been shallow. Considering that the Eurozone calendar is light this week, the currency pair’s trend will be determined by the market’s appetite for U.S. dollars and the chance of a Federal Reserve rate hike next week. The Eurozone’s employment report and German ZEW survey are scheduled for release tomorrow. These numbers are expected to be mixed so if EUR/USD drifts to 1.1300, it would be a sell and if it drops to 1.12, it could bounce. Either way, targets need to be kept tight on both sides of the trade.

The Australian and New Zealand dollars staged a strong comeback. Both currencies were trading sharply lower at the start of the North American session when Dow futures were down more than 100 points. However the U.S. equity markets opened in positive territory paving the way for a recovery that would eventually turn AUD/USD and NZD/USD positive. Fed President Brainard’s dovish comments provided the fundamental support for the rallies. Tonight Chinese industrial production and retail sales numbers are scheduled for release – these numbers are difficult to handicap but economists are looking for stronger manufacturing activity and steady consumption. Good data will extend the gains for commodity currencies while softer numbers will sap the rallies. We still like selling AUD ahead of this week’s employment report and buying NZD ahead of GDP so our focus is on AUD/NZD.

USD/CAD gave up its earlier gains to end the day unchanged. Since there are no major Canadian economic reports scheduled for release this week, the loonie is taking its cue from oil. The sell-off in the dollar has allowed crude to find a bottom above $45 a barrel and we believe that further gains are likely this coming week. USD/CAD ended the day near its lows making a run to and most likely below 1.30 seem inevitable.

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