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Article / 21 June 2016 at 7:59 GMT

FX Update: Yellen testimony no distraction from Brexit wait

Head of FX Strategy / Saxo Bank
  • GBP squeeze continues above 200-day MA
  • Rally could take sterling to 1.55 if 'Remain' wins
  • Yellen speech 'couldn't come at a more awkward time'

Time for 1.50? In the event of a 'Remain' vote, the sterling squeeze 
could continue quite a bit higher from current levels. Photo: iStock 

By John J Hardy

The sterling squeeze continues, with GBPUSD vaulting above the 200-day moving average late yesterday and into this morning, though the range high lies somewhat higher above 1.4750. 

I won’t bother to cover the latest polling, as this is a case of raw sentiment, nervous positioning and the complete unknown around Thursday’s vote. Judging from the market action merely based on polling shifts, we could risk a sizeable further squeeze in the event of a Remain vote that could immediately see GBPUSD to 1.52-1.55, though we would rate the pair a longer term sell at such levels. 

“Mr Yen”, the former finance minister Eisuke Sakakibara, calls USDJPY to 100 an inevitability. The Bank of Japan minutes overnight saw some interesting debate on the efficacy of negative rates, with some arguing that they impair the functioning of financial markets. 

Another part of the minutes discussed that it it will take some time to understand the effects of the current policy mix, which could be misleading at present due to financial market turmoil. There are few takeaways in any case. Prime minister Shinzo Abe was out speaking this morning and said monetary policy was the BoJ’s business, and therefore not exactly throwing open the door to fiscal helicopter money in cahoots with the BoJ.

While we wait for Thursday’s big event, we have plenty to distract us today and tomorrow as Federal Reserve chair Janet Yellen is out speaking on the US economy and monetary policy. The testimony couldn’t come at a more awkward time, both because the Fed was caught wrong-footed in its hawkish guidance and due to the overhanging uncertainty from the UK referendum vote. 

But the market will still look for a clue or two on how the Fed positions itself in a hypothetical recession scenario, if that question pops up from lawmakers. Yellen should spell out to lawmakers that if the US is tilting into recession, the Fed can do little about it so close to the zero bound and that QE is a worthless tool and that the only way to stimulate real demand is with fiscal policy. 

Alas, Yellen is unlikely to take such a tack as it goes against the Fed’s belief that it is the master of the markets and economy. Instead, look for lots of toe-curling prevarication on the true nature of what plagues the US economy and a shaky lack of confidence from the Fed chair, if we’re to take recent performances as a guide.


GBPUSD yanked higher to the top of the range and above the 200-day moving average. Assuming a Bremain vote squeezes the still heavily short sterling positions, we could see a swift rally to the heart of the old range in the 1.52-1.5400 area, but the pair rates a long-term sell at such levels.


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Source: Saxo Bank 

The G10 rundown

USD – The greenback not impressing as the recent relief rally in risk appetite sees a weaker USD on the recent dovish FOMC meeting allowing expression in the market. Yellen testimony today – can we expect anything worth hanging our hat on when the Fed has no crystal ball and is clearly data-dependent?

EUR – A bit of a lose-lose setup for the euro here, which might gain a bit against the riskiest currencies in the event of a shock Brexit vote, but could quickly feel the pinch. Meanwhile, a Remain vote might only see modest upside in other euro crosses as EURGBP pushes sharply lower.

JPY – USDJPY bumping a bit higher overnight, most likely on the general drift higher in risk sentiment. GBPJPY is likely this highest beta pair to the UK referendum vote on Thursday, regardless of its direction.

GBP – Plenty more to squeeze out of EURGBP downside if the UK chooses to remain on Thursday. We’re intrigued how the market would treat a Brexit in the EURGBP pair, however, which might weigh quickly weight on the euro broadly.

CHF – Market has removed a portion of the bid for francs on reduction in Brexit fears, but only a modest one as the EURCHF chart still looks remarkably heavy ahead of Thursday’s vote.

AUD – A bounce overnight on the wait-and-see stance from the RBA minutes. Note the quarter-on-quarter housing price drop in Q1, the first time since 2012 prices have fallen and ahead of new rules that will apply a large stamp duty on foreign purchases of Australian real estate.

CAD – Stubborn oil and negative USD focus amid risk sentiment recovery has USDCAD back lower, but not with much conviction. Looking for a fresh rally above 1.3000 post-UK referendum to set the tone, while recognizing downside volatility potential if the market loses its head this Friday on a Bremain, risk sentiment melt-up.

NZD – Market passive on NZD as NZDUSD mulls the cycle highs above 0.7100 and AUDNZD lost downside momentum after a recent plunge. Bigger picture, the kiwi vastly overvalued.

SEK – Resurgence in risk sentiment sees EURSEK reverse back down into the range. All eyes on Thursday UK vote for whether Stay (EURSEK down) or Leave (EURSEK up?) prevails.

NOK – Oil stubbornly maintaining the price in the $50/barrel area and looking forward to tomorrow’s Norges Bank, which is unlikely to produce fireworks. Watching whether we get confirmation of the bearish reversal setup after the move above 9.40 was rejected – requires that we see the UK referendum result.

Upcoming Economic Calendar Highlights (all times GMT)

  • Germany Jun. ZEW Survey (0900) 
  • UK Jun. CBI Trends in Total Orders/Selling Prices (1000) 
  • Turkey Central Bank Rate Decision (1100) 
  • Hungary Central Bank Decision (1200) 
  • Euro Zone ECB’s Draghi to Speak to Parliament (1300) 
  • US Fed’s Yellen to Testify on Monetary Policy before Senate panel (1400) 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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