Key developments in FX today
By John J Hardy
- An apparent shift in UK polls over the weekend has the market judging the odds of a Brexit significantly lower this week, which has induced a steep rally/squeeze in sterling pairs that has reversed a significant portion of the losses suffered by sterling in recent weeks.
- Other risk-correlated currencies jumped on the enormous positive shift in risk sentiment, with commodity currencies regaining significant ground and even contending with local highs against the US dollar.
- The euro has been caught a bit in the middle, somewhat stronger aginst the US dollar, but with less conviction as the focus is on more traditional risk-correlated currencies.
- Gold has generally been a loser today after previously gaining a significant bid on the spike in Brexit fears prior to this recent relief, though there may be a residual bid if US data continues to worsen and the market starts to mull quantitative easing version four from the Fed rather than the timing of the next hike. A launch of helicopter money from the Bank of Japan may be another issue on precious traders' minds.
EURUSD came up short just south of 1.1400, the key resistance area ahead of the 1.1500 level and higher. We'll know the lay of the land post UK-referendum here, with likely far less upside potential on a Bremain vote than downside potential on a Brexit vote, particularly as the latter has been priced back out again.
A tremendous squeeze on the apparent momentum shift in polls in favour of Bremain, but are bulls bold enough to squeeze through the 1.4750 and 200-day moving average area before we even know the outcome of Thursday's vote?
The resurgence in risk appetite has AUDUSD pushing on the highs for the cycle again after the downside pivot zone attempt below 0.7300 failed. With such momentum, we could see carry through to new local highs, with 0.7570 the next technical level of note (61.8% Fibo retracment), but as with every risk-correlated pair, we'll need to see the Brexit result and immediate reaction here to get a firmer read on directional potential.
As with other small currencies, the NOK picking up strength against the most liquid currencies and now we have a compelling evening star candlestick formation today that is mae more compelling by its occurence beyond the previous 9.40 range highs and straddling the 200-day moving average. But no currency pair can escape the risk of the UK referendum vote on Thursday, so it remains difficult to draw firm conclusions, but this is a classic bearish technical development.
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank