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GBP - On Brexit Watch This Week

  • Kathy Lien
  • 20 March 2017

Daily FX Market Roundup 03.20.17

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

 

Who would have thought that when the Federal Reserve raised interest rates by 25bp, the U.S. dollar would tank?But that was exactly what happened this past week as the greenback tumbled against all of the major currencies.  Investors began unwinding their long dollar positions ahead of the rate decision on the view that Fed Chair Janet Yellen would not be hawkish enough and they were right.  She did not suggest that the next hike would be in June and the dot plot forecast showed U.S. policymakers looking for 2 and not 3 more rounds of tightening this year. Additionally it was not a majority decision as Fed President Kashkari voted to keep interest rates steady.  The market expressed their disappointment at the lack of overwhelming hawkishness by selling U.S. dollars and buying bonds, sending 10 year Treasury yields back down to 2.5%.  The Fed is still the only major central bank planning to raise interest rates but its going to be a few weeks and maybe a few more months before there's enough data to convince them that June is the right time to tighten instead of September.  For forex traders, the key question is whether the dollar is a buy on dip or sell on rallies in the coming weeks.  We think that the downside in USD/JPY is limited to 112 because there are a number of Federal Reserve officials speaking next week and they will most likely take the opportunity to remind everyone that interest rates are still moving higher.  Fed Chair Janet Yellen takes to the podium along with FOMC voters Evans, Dudley, Kaplan and Kashkari.  There are no major U.S. economic reports on the calendar so Fed speak will be the primary driver of dollar flows.  We don't expect big moves and instead anticipate consolidative price action in USD/JPY. 

 

The one currency that could breakout is sterling because the U.K. government could trigger Article 50 any day over the next 2 weeks.When that happens, we believe that sterling will fall quickly and aggressively as the inevitable becomes reality but the recovery could be just as swift because the country's actual final exit from the European Union will be years from now.  However the U.K. can't expect the EU to play nice as evidenced by today's comment that trade talks will not happen before Brexit payment deal.  EU headlines could extend the losses for sterling but if Article 50 is triggered and there's nothing more OR if the trigger is delayed another week, losses in sterling should be limited after the Bank of England's unexpected hawkishness.  Although recent data has been weak and policymakers noted that there were few signs of growth slowdown and wages are softening, the talk in the central bank is not about easing but tightening.  According to the minutes, a number of policymakers believe that a "rate hike could be needed sooner" with MPC policymaker Kristen Forbes voting for an immediate 25bp tightening.  This dissent caught the market by complete surprise and sent sterling sharply higher.  Forbes believes there is less justification to tolerate above target inflation and for this reason sees the need for tightening.  While we don't expect the Bank of England to raise interest rates any time soon, the level of dovishness within the policymaking ranks is diminishing.  Next week's U.K. inflation and retail sales report should show some improvements in the economy but the focus should be Brexit headlines.

 

Unexpected hawkishness from the European Central Bank also supported the euro this past week. ECB member Nowotny said a rate hike could be needed soon.  We knew from this month's monetary policy announcement that Eurozone policymakers have grown less dovish but few expected the central bank to be considering tightening especially in light of the region's political uncertainties.  According to the latest polls on Friday, despite the far right's failure in the Netherlands, Le Pen is closing the gap with Macron.  Fundamentally however the Eurozone economy is improving and we expect this to be confirmed by next week's PMI reports.  Although we believe that the dollar could find some support against the yen in the near term, we are still looking for EUR/USD to test 1.08 as long as political headlines don't stifle the rally. Of course this latter risk is a big one that could derail the currency's rally at any point in time.  The Swiss National Bank also left monetary policy unchanged this past week but the Franc caught a bid after SNB President Jordan said they need to remain vigilant in the current uncertain environment. He indicated that while they are not a currency manipulator, they have leeway to intervene and cut rates further.

 

The Australian, New Zealand and Canadian dollars ended the week sharply higher against the greenback despite softer labor data from Australia and slower GDP growth in New Zealand.  The strength of these currencies are a direct function of U.S. dollar weakness but the higher these currencies climb, the more problematic they become for their respective economies.  With that in mind, the Reserve Bank of Australia has been relatively optimistic and next week's minutes should reflect that whereas the Reserve Bank of New Zealand has more to be worried about. The RBNZ meets next week and we think they will attempt to talk down the currency.  Since their last meeting in February, consumer spending has fallen, GDP growth slowed, the trade deficit widened while dairy prices declined. There was some strength in the services and manufacturing sectors but with the currency so strong, we don't think that will be enough to ease the central bank's concerns.  USD/CAD will also be in play as the currency pair attempts to find a bottom near 1.33.  Canadian retail sales and consumer prices are scheduled for release and unfortunately the trend of softer data could continue. 

 

 

 

 

For more information, they can be reached at http://www.bkforex.com/.

 

 

The information, including Commentary and Trade Ideas, provided on BKAssetManagement.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. BKForex Advisors LLC and BKAssetManagement.com are merely providing this information for your general information. The information and opinions presented do not take into account any particular individual's investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite.

BKForex Advisors LLC will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on BKForex Advisors LLC. BKForex Advisors LLC do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought. 


About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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