FX Focus: - Busy week with the FOMC, BoE and US jobs!

Foreign exchange analyst Rajan Dhall runs through the big issues that will drive the major currency pairs this week.

Summer markets look to have taken hold, certainly in the currency complex as we continue to see low volatility in the major pairings.  There seems to be little interest away from pushing the positive US dollar (USD) narrative as we go into the tenth week of a consolidation pattern in the dollar index (DXY) which has failed to make sustained headway beyond the 95.00 level yet again. 

Given this is as much a yield play as anything else, there is little reason to abandon USD longs at this stage.  One would expect to see some relief for the funding currencies as a function of moderate safe haven demand at the very least given some of the distress seen in the other asset classes.  

Based on some of the exposure data, speculators seem happy to continue selling the Japanese yen (JPY) for a number of reasons, all of which lead effectively, to the same thing - the carry trade.  This suggests markets are happy to overlook some of the negative aspects which would traditionally cause investor movement to the sidelines. 

Economists and strategists alike continue to warn of the detrimental impact of tariffs and trade wars on global demand, but this seems to have had little effect as familiar benchmarks lead to assumed correlations.  By this we mean the equity markets.  

Even though Facebook Inc A and Twitter Inc, along with Intel Corp, suffered some heavy losses last week, the indices on Wall St remain in an uptrend.  Gold is long established as protective cover (hedge), but heavy futures selling suggests leveraging is going into overdrive again. 

We don't have to wait too long into the week until we get the outcome of the Bank of Japan (BoJ) meeting, and in the past week there have been reports that the central bank may have a rethink its uber-easy accommodative stance which is pumping up their balance sheet to uncomfortable levels.  

While many expect little change in policy and rhetoric for fear of a taper tantrum (or sorts), the BoJ will have to address this at some point.  Some suggest that stealth tapering is underway already, but this is sporadic at best.  In the current climate, the BoJ will do everything to dissuade a material drive into the JPY, which is naturally key for exporter competitiveness now more than ever.

Traders have been looking to fade the USD/JPY weakness into the mid 110.00's, and fading the run up to the BoJ decision also looks to be a favourable move.  While this may offer some temporary opportunities, it assumes that risk appetite will resume into the summer months. 

Past performance is not a guide to future performance

US and UK policy meetings

We also have the FOMC meeting midweek, but this will be overshadowed by the Bank of England's (BoE) MPC meeting on Thursday.  The Fed is not seen moving in interest rates again until September and pricing for this is comfortably over 90%.  

Somewhat surprisingly, a 25bp rate hike from the BoE this week has odds of over 70% which, based on currency levels, suggests there is clear scepticism.  Even if the MPC did decide to normalise, there is a fear that this will only compound economic woes for householders and corporates alike, with Brexit uncertainty throwing up all sorts of doomsday scenarios in the media again.  

Reports that both sides are preparing for a 'no deal' Brexit outcome have been downplayed by the UK and EU as responsible actions in order to cover all possibilities. However, over the weekend, the UK press made a meal of the participation of the army in preparing for supply disruptions.  This all has the air of the panic induced on the aftermath of the referendum two years ago.  While sterling has room to weaken, the price action suggests traders are a little more sanguine on the UK's ability to weather the storm in the event that a trade deal is not reached. 

Indeed, there are greater fears that the current government position is becoming more vulnerable by the day.  While the Labour party is having its own internal troubles, recent polls on the handling of Brexit do the PM no favours. She has clearly sought to find some common ground between pro and anti EU factions within her party, but the Chequers Plan continues to draw more criticism than anything else.  Having moved into the second half of the year, we are now focusing on Oct and Nov, which is when both sides hope to have an agreement in place.  It is a tough ask, but not impossible.  

It is hard to see Cable move back to the mid 1.3000's under the circumstances - much as the market has tried in recent weeks.  We note a band of resistance coming in from the mid 1.3200's to 1.3300, and this will be the first hurdle if the BoE hikes rates and we get the obvious knee-jerk reaction.  

Past performance is not a guide to future performance

EUR/GBP continues to grind higher and, over the next few days, the month end demand from European central banks could add a lift which could see us moving closer to 0.9000 again.  A move beyond here will require a specific catalyst given the EUR has its own negative factors, both economic and political.  Even so, we are at crunch time in the EU/UK talks, though economists point to disruption in Europe as well as the UK from a cliff edge Brexit result. 

US jobs

Even though the FOMC meeting is largely a non-event this time around, it is also payrolls week in the US.  Usually, covering this event would take pride of place at the start of the report but, as we have seen lately, the US data is prompting a limited response in the market.  

The data it strong but the USD is stretched.  If we get a strong headline number which is expected to be close to 200k, then this will have to be accompanied by wage growth to push market pricing towards the full 50bps projected for the second half of the year.  So far, rates are showing around 37bps on the board so 4 hikes this year is not a given at this stage.  

Based on the fact that the European Central Bank (ECB) has once again stated that rate normalisation will not start until the late on in 2019, EUR/USD sellers are happy to play the differential.  

The headline rate looks capped by 1.1800 for now, though a number of failed attempts on 1.1500 have now resulted in some reluctant moves below the 1.1600 mark.  This was exacerbated by comments from president Trump accusing both the Chinese and the EU of currency manipulation.  It is hard to see this in the EUR given the multitude of flows going through the pair.  

Past performance is not a guide to future performance

At this point it is worth noting the downturn in USD/SEK despite the strong carry in favour of the USD. Swedish GDP for Q2 has come in strong at the start of the week at double what the market was expecting - 1.0%.  This puts the annualised rate at 3.3% vs 2.6% expected and USD/SEK has fallen back hard.  

Month end flows also point to some USD selling in portfolio re-balancing over the early part of the week.