Global markets are reeling this morning after the US president trumped his previously announced tariffs on $50bn worth of Chinese imports with the threat of another $200bn worth should the Chinese retaliate with penalties of their own on his initial tariffs. The heightened fear of a full-blown trade war has slammed into equities and EM currencies with the usual safe-haven assets – gold, bonds and the Swiss franc – gaining.
Article / 20 April 2017 at 7:19 GMT

FX Update: Sterling rally firms, USD near pivotal levels — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Sterling rally firms above 1.2775 and looks good for further gains
  • French election could be pivotal for deciding where GBPUSD goes
  • USD index dip to 99.00 puts dollar in last-stand territory
  • Commodity currencies take hit from oil selloff
k Emmanuel Macron would represent a revolution of French politics. Photo: Shutterstock

By John J Hardy

The sterling rally saw consolidation overnight, and GBPUSD saw an orderly test of the previous salient in the 1.2775 area that saw fresh buying coming in and sending the pair back well over 1.2800 in early London hours this morning. The hope for prime minister Theresa May is that a stronger mandate and bigger Conservative majority in Parliament makes her negotiating stance more credible domestically and with EU counterparts, as well as firmly putting to rest any talk that the Brexit vote is reversible. 

And who will May and the UK be negotiating with by the end of this year on Brexit? The two key EU leaders are those of France and Germany – both to be decided this year. And the surprise in this weekend’s first round of the French election could be an Emmanuel Macron and Francois Fillon one-two, with Le Pen not making it to the second round.

Certainly a Fillon win in France in the second round would provide a stronger position for May. Macron is more of an unknown quantity, though as one French commentator points out, a Macron win still would represent a revolution in French politics of a magnitude not seen in decades.

GBPUSD consolidation

The rally in cable held very well, with the consolidation an orderly one back to the previous major high near 1.2775. The focus remains higher here as long as we remain north of perhaps 1.2700, with the next major chart levels at 1.3000 and the huge 1.3500 level that defined the low for decades before the Brexit vote.

GBPUSD finds solid ground above 1.2775
 Source: SaxoTraderGO

Oil sold off sharply Wednesday after the release of US weekly inventories and provided a headwind for oil-linked CAD, NOK, and RUB and another chink in the armour for the inflation trade. Still, given the Fed talk of unwinding the balance sheet later this year and the degree to which the market has unwound rate hike expectations, can we continue to run lower still in US yields?

Yesterday saw a modest attempt to pick up the pieces of the reflation trade, with gold selling off and both US Treasuries and the JPY doing the same. Using USDJPY as the proxy for these three developments, it looks like the pair needs to make a stand in this important 108.50 area to keep the hopes for a return of the reflation trade alive.

The G-10 rundown

USD – the dollar index dipping toward the big 99.00 level that was the previous major low and where the 200-day moving average has now risen – needs to make a stand here or the USD bulls will have to capitulate to a degree.

EUR – is a Macron v Fillon second round in the offing? This is perhaps the higher odds surprise situation and perhaps also the most euro-supportive outcome from this weekend’s first round of the election.

JPY – considerable consolidation in some of the JPY crosses – with GBPJPY in an outright rally stance, and the USDJPY mulling the critical 108.50 area - together with the broader USD picture, USDJPY looks pivotal here.

GBP – the strong rally has held up well and the next test is how the polling shapes up in the days ahead, but more important is how the French election pans out. Fillon squeaking through to second round perhaps is most sterling positive.

CHF – test for EURCHF pulse over this weekend’s French election and then subsequent weekly sight deposit data for signs of easing inflows.

AUD – AUDUSD looks heavy, but broader USD picture not well supported here, so mostly about AUD weakness. Watching reflation trade and key commodity prices.

CAD – weak oil prices see USDCAD bulling back into the last resistance zone ahead of the 1.3600 top.

NZD – stronger than expected CPI provide a modest boost – nothing to write home about yet, but AUDNZD has dropped back through the pivotal 1.0750 level and NZDUSD bears are at a loss for any momentum.

SEK – Swedish short rates have dribbled back lower in line with the tendency elsewhere and preventing EURSEK, perhaps in picking up more downside momentum, which perhaps requires a more optimistic stance in asset markets and a renewed interest in the reflation trade.

NOK – EURNOK ran back sharply higher on the drop in oil prices and NOK will be vulnerable to any further oil weakness on the Norges Bank’s recent major shift in lower inflation expectations. 9.25-ish is the range high.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – US Fed’s Powell (FOMC Voter) to speak 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1230 – US Apr. Philadelphia Fed Survey 
  • 1530 – UK BoE’s Carney to Speak 

— Edited by Martin O'Rourke

John J Hardy is Saxo Bank's head of forex strategy


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