Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
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Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
FX Update: GBP woes extend. Euro eyes EU council meet
John J. Hardy
Chief Macro Strategist
Summary: Sterling has broken rather decisively lower in the wake of the Bank of England meeting yesterday. Elsewhere, the USD and JPY are firm versus the euro ahead of the EU council meeting press conference later today, while broader risk appetite continues to point to complacency.
Yesterday’s sterling weakness in the wake of a nominally hawkish BoE meeting is one of the few strong directional stories of the moment, with GBPUSD trading within hailing distance of the last major Fibonacci support (61.8% of recent rally) at 1.2356 as we have highlighted recently, and EURGBP now well above the 0.9000 level, after never having closed above that level since late March. Today, a French minister had fairly stern words on the Brexit deal, saying that France wouldn’t be rushed into a deal.
Elsewhere, the Norwegian krone has erased a good portion of the undeserved boost it got in the wake of yesterday’s Norges bank meeting, likely as it merely tracks oil prices and risk appetite. Brent crude has traded all the way to just short of 43 dollars per barrel and Ole Hansen, our commodities strategist, suggests this is getting into nosebleed territory.
The EU council meeting press conference could yet provide some last minute drama for Euro crosses late in the day today and, while equity markets look very complacent after volatility has faded sharply in recent sessions, today is “quadruple witching” (the quarterly Friday that sees the expiry of all financial futures, options-on-futures and physical stock options) and some measures of sentiment suggest a stretched market.
Chart: EURJPY
EURJPY has recently erased a good portion of the considerable run-up that came in the wake of the Merkel-Macron breakthrough in proposing a recovery package to be funded via the EU budget. The price action has taken the pair back to the 200-day moving average ahead of today’s EU council meeting press conference. The path forward for Europe remains complicated from here – but a positive spin from the EU on the prospects for a smooth passage of the principles of the package and ongoing strong risk appetite could support the pair from here, while the JPY only seems to thrive on mayhem and safe haven seeking, especially in US treasuries.
The G-10 rundown
USD – the US dollar is holding up rather well, but risk appetite indicators are stuck in limbo, as are many USD charts at the moment. The market not reactive to data nor the Fed’s balance sheet actually shrinking over the last couple of weeks.
EUR – the euro awaits the tone from today’s EU council meeting. A press conference with Von der Leyen and others late today in which we look for the degree of solidarity, or lack thereof, on display.
JPY – the yen perhaps reaching the maximum of its potential at the moment unless we are set for a new round of risk off from some unknown catalyst.
GBP – sterling struggling badly, still nominally not in full retreat versus the USD unless the 1.2356 area Fibo retracement in GBPUSD is taken out. A long wait for Brexit talks to resume and for evidence on the shape of the recovery to take shape in coming months – and the GBP rout could deepen on any new risk aversion.
CHF – the euro sagging here to the lowest portion of the important 1.0650-1.0700 pivot area ahead of the EU council press conference – the close today an important setup for next week’s action.
AUD – the AUD keeping quiet in the range in AUDUSD terms as risk appetite supports, but some of the recent commodity reflation trades have eased. A bit concerned for AUD on the risk of a resumption of US-China trade tensions as Trump looks increasingly cornered.
CAD – not impressed with CAD’s performance, given surge in oil prices and firm risk appetite – waiting for catalysts either way. Risk of tensions with China rising as the latter indicts two Canadian citizens on spying charges.
NZD – the RBNZ meeting is up for next week. Remember the last meeting when the RBNZ was laying the groundwork for a negative interest rate regime? Few signs of that as many central banks have remarked that the outlook hasn’t proven as , but then again, kiwi has already rebounded, so don’t see much upside potential here for the kiwi next week.
SEK – can’t gin up a reason for SEK weakness here save for Sweden perhaps feeling isolated by travel concerns linked to its less harsh Covid19 shutdown and worries of a resurgence in cases. EURSEK next resistance level above local highs up toward the 200-day moving average near 10.66 at present.
NOK – not much more to get out of the NOK here unless crude oil prices launch a new phase of additional strength above the local range – the 200-day moving average in EURNOK, near 10.48 currently, provided very precise support at the bottom of the run lower last week – upside breakout area of 11.00+ only looks a risk if we get a new cycle of growth concerns and significant sell-off in oil and equities.
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