Wednesday's FOMC outing showed the Powell Fed to be less model-driven than its predecessors, but the lack of any language confirming four 2018 rate hikes sent the dollar plunging lower.
Article / 26 September 2016 at 7:44 GMT

FX Update: Sterling slide continues, USD too quiet

Head of FX Strategy / Saxo Bank
  • Many big firms considering quitting UK  over Brexit
  • GBPUSD may be headed for new cycle lows
  • TRY gaps lower on Moody's debt downgrade
By John J Hardy

A KPMG Survey of heads of UK companies with between £100 million and £1 billion in annual revenues found that over 75% are considering moving either their headquarters or operations outside the UK due to the Brexit vote in June. On Friday, EURGBP jumped to new local highs and GBPUSD challenged below 1,3000, possibly setting the ball rolling to new lows for the cycle this week after the long period of consolidation within a wide range after that June vote. 

A Moody’s downgrade of Turkey’s sovereign debt to “junk” saw TRY gapping weaker to open the week – the reasons given were concerns on the rule of law after the recent coup attempt, balance of payments pressures and a “weakening in the previously supportive credit fundamentals”. Still the outlook was kept at stable and the ratings agency noted the flexibility of the Turkish economy.

This week’s chief storyline is whether the USD selloff in the wake of the Federal Open Market Committee meeting last week will follow through, or if the takeaway was entirely misguided and we are about to see the US dollar turn around and rally again – the odds of the latter have risen given the sudden lack of conviction after the initial reaction. The subplots included the notable weakening of sterling again and likewise the New Zealand dollar, both of which may remain under pressure this week. Also note NOK and SEK, where the former caught a strong bid on Norges Bank last week and broke key support in EURNOK, while the latter is poised right at the key 9.60 area in EURSEK.


CAD reversed hard on Friday from the psychologically important 1.3000 level as CPI missed badly in August – showing. The USDCAD chart has churned in a wide range since bottoming in May just below 1.2500 and the upside trigger now clearly etched for a new uptrend is the 1.3255 level tested twice and now coinciding with the 200-day moving average.

Source: SaxoTraderGO
The G-10 rundown

USD – Where is the follow through lower from last week’s FOMC meeting? We’re now three trading days removed from that event risk and have yet to show follow through USD weakness, a sign that it may not be forthcoming and a sign that central bank guidance is losing its relevance for markets. Risk of a USD pickup this week grows sharply if USD refuses to weaken through tomorrow’s close.

EUR – Looks firm in most of the crosses, and clearly not the high beta currency of the moment. Watching today’s German IFO as a sentiment test for the single currency.

JPY – USDJPY is Exhibit 1 in the lack of follow through after the initial reaction to last week Bank of Japan and FOMC meetings – this week, we need to either push through the sub-100.00 level or we risk a powerful reversal if we start the cascade of upside implications that may be triggered if the pair closes well above the 101.25/50 area.

GBP – the action Friday has sterling on the move and this week tells us whether the bears are set to test the lows for the cycle since the Brexit vote. No particularly pivotal data points this week, though we do have August mortgage data up on Thursday.

CHF – the franc doing its best to be uninspiring again – 1.0800 is the range support of note in EURCHF and the CHF weakness story may only pick up again on a notable rise in interest rates.

AUD – Has surged against the kiwi and AUDUSD looks a bit lonely among commodity currencies in remaining resilient versus the USD – will that pair chop back lower again.

CAD – weakened sharply on Friday on a very big CPI miss. ( As well, there may be some background pressure on CAD from Trump’s surge in the polls on the idea of NAFTA coming under threat in a Trump presidency.

NZD – last week’s broad weakness looks like the emphatic change of cycle we have been looking for and the question is now where the weakness will be expressed most clearly – possible candidates include NZDUSD and EURNZD.

SEK – the krona poised near the key 9.60 level in EURSEK and appearing to want to test above – no rallies have sustained above that level after numerous tries over the last few years – will this time be different?

NOK – Got a boost on last week’s flattening of rate guidance from Norges Bank – EURNOK needs to stay below 9.15 to maintain downside focus, but elsewhere, NOK may prove firm in the crosses, with oil prices a wildcard, given all of the noise on possible Saudi/Iran production freezes and even cuts.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0800 – Germany Sep. IFO Survey 
  • 0830 – UK Aug. BBA Loans for House Purchase 
  • 0930 – Switzerland SNB’s Jordan to Speak 
  • 1230 – Euro Zone ECB’s Coeure to Speak 
  • 1400 – Euro Zone ECB’s Draghi to Speak before European Parliament 
  • 1400 – US Aug. New Home Sales 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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