FX Update: This week in FX was watching paint dry. Not so next week.

Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Market extremely complacent ahead of important macro risk calendar next week. More potential for ECB and BoE to impact expectations for next six months than the Fed.

Yesterday saw a modest pick-up in US treasury yields on yet another drop in the weekly claims (to 186k, the lowest since last April) and a slightly firmer Q4 US GDP estimate than expected. This helped keep the USD from losing further ground, but it feels as though USD traders see little need to trade here, with a string of important US macro risks coming into view next week, including the FOMC meeting on Wednesday, the same day as the ISM manufacturing survey, and then Friday’s jobs and earnings data and ISM Services (recall the oddly large swoon for the December ISM Services survey).

The chief driver of USD weakness of late has been the powerful easing of financial conditions. As we have noted on the podcast of late, one major measure of financial conditions suggests that financial conditions in the US are now easier than when the Fed began hiking rates early last year. Some of that is on USD liquidity coming from the US treasury as it winds down its account with the Fed, and there is a further $300 billion or so of further fuel if the treasury takes the account close to zero in coming months, which it will do as long as the US debt ceiling situation remains unresolved. Elsewhere, the Bank of Japan’s operations have added enormous global liquidity as well, the latest being its huge 5-year loans for bonds operations. Endless irony in the BoJ driving enormous liquidity easing as a part of its supposed roadmap for exiting from hyper-easy policy – that has been the flip-side of JPY strength.

Chart: GBPUSD
Cable could prove one of the more vulnerable USD pairs next week to USD strength if we see a combination of market complacency yielding to a bit more uncertainty (bad US data could prove bad news for risky assets on the impact on corporate earnings, and supportive of the USD, while stronger than expected US data could support the USD on repricing the forward Fed expectations back higher). Only a very gentle soft-landing scenario would seem able to keep the USD bears in business here. As well, we could see the Bank of England allowing itself to indulge in less hawkish guidance (to reduce their role in adding to the severity of the oncoming recession) after the recent sterling strength and decelerating inflation data. There is certainly plenty of room for a consolidation lower to 1.2200 and perhaps even 1.2100 without triggering a major reversal, while a move challenging to 1.2000 would begin to more thoroughly neutralize the bullish case encouraged by the recent test and strong rejection of the break below the 1.2000 area and 200-day moving average.