GBP/EUR Experiencing “Cross-rate Nirvana”

Sterling lifts on strengthening undertones. Last week, GBP rallied with the help of positive data and shifting political developments. There was some drama on Thursday as Sajid Javid abruptly quit as Chancellor, replaced by Rishi Sunak. This gave the pound a shot in the arm, driving GBP/USD back through the 1.30 mark. Since the general election there have been occasions where political uncertainty, trade negotiations, and a generally strong dollar looked to jeopardize a larger rally in sterling, but it has held nevertheless. And while there is expected to be more bumps in the road ahead, the fact that sterling keeps popping back with vigour against the dollar suggests the path of least resistance is higher. Longer-term we are bullish sterling on a relative basis with the economic outlook set to continue improving.

Data ahead: Employment figures on Tuesday, CPI and the House Price Index on Wednesday, Retail Sales on Thursday, then Markit Services and Manufacturing data on Friday.

The ‘eur-woe’ hit new cycles lows as anticipated. The data and news-flow has been anything but kind, and with EUR/USD dropping 2.4% so far this month the dour sentiment is being fairly reflected. It’s on pace for its worst monthly loss since May 2018. There is long-term technical support that extends a little lower from current prices via a 20-year trend-line and French election weekend gap-fill at 1.0724. Support might spark an interim bounce, but generally the fundamentals underpin further long-term weakness. A slide to the 2017 low at 1.0340, and then parity or worse could be on the cards this year.

Data ahead: Eurozone and German ZEW surveys on Tuesday and Publication of account for January’s ECB Monetary Meeting due out on Thursday.

GBP strong, EUR weak equals “cross-rate nirvana.” The conflicting undertones between the two currencies has them simultaneously heading in opposite directions, making for a strong driver of the cross-rate. GBP/EUR has been range-bound since the sterling flash-crash in October 2016, trading in a range of 1.0573 and 1.2081. That range is under real threat of breaking in the days and weeks ahead. With divergent paths becoming increasingly evident it wouldn’t be surprising to see GBP/EUR erase the Brexit-vote decline up to 1.3078.

GBP/EUR Chart – Working on a range breakout

The dollar rise continues. There might not be a great reason to own the dollar other than things just look a little better in the US than elsewhere. And to be clear, when looking at the greenback packaged via the US Dollar Index (DXY), the index is largely driven by the euro as it accounts for about 57% of its weighting.

Data ahead: FOMC meeting minutes are due out on Wednesday along with Housing Starts/Permits, Jobless Claims on Thursday, and Friday brings Market Services & Manufacturing.

Yen goes flat, Aussie stabilises for now. The Japanese yen hardly moved last week as FX volatility, per the JP Morgan G7 Volatility index, dropped to fresh record lows. Nothing seems to keep FX traders up at night, which is exactly what should keep us up at night. Markets are worryingly complacent. The coronavirus still remains a viable threat to financial market volatility. China said the number of cases on the mainland has climbed to 68,500, with a total death count of 1,665. The full economic impact on a global basis is still a significant unknown.

AUD/USD is finding support for now as it flirts with fresh decade+ lows. A rebound may be in order, but the backdrop remains the same – weak. Markets are leaning towards interest rates getting cut to a fresh record low at the April RBA meeting.

Data ahead: On Monday the RBA will release minutes from the Feb policy meeting, Australian employment data is due out on Wednesday. In Japan, inflation data via CPI will be released on Friday.

In summary, sterling is one of the lone bright spots versus the dollar, and is strengthening its case to shine strongly against the euro for some time to come. The dollar is likely to hold strong in its bid to make it back to multi-year highs. The yen is reflecting the low volatility environment in developed market FX these days. Aussie is clinging onto decade+ lows, but likely not to last. FX volatility remains suppressed, for now.