The key mover this morning has been the pound, which is the weakest performer in the G10 FX space. It has been sold heavily since the London open and GBPUSD has just fallen through 1.4900 - its lowest level since 2010. It is finding some buying interest at 1.4870, which is acting as short term support.
Muted moves elsewhere
Compared to the rest of the FX world, the pound's sharp sell-off is in contrast to fairly muted moves elsewhere. EURUSD is managing to hold onto the 1.30 handle for now. In the short term momentum indicators are starting to flatten out suggesting that we could be about to range trade in EURUSD for the next few days. From a fundamental perspective, the key driver of EURUSD this week may be down to two things: 1, Italy's continued political impasse after Fitch downgraded the third largest economy into the currency bloc and 2, the EU summit that takes place on Thursday and Friday. This summit takes place while Italy is still without a government, Mario Monti is expected to attend, but the focus will be on the German's insistence on austerity. The stage is set for a showdown between the Northern states led by Germany, and the Southern periphery who want some slack in deficit targets to feed economic growth. A showdown could see EURUSD tumble through 1.30 back towards 1.2880 support.
Even the dollar is fairly muted today. The dollar index is stable this morning after rising to its highest level since August 2012 on Friday. This followed a push higher in Treasury yields, which rose to an 8-month high on the back of the stronger payrolls report. They have pulled back today; however they remain above the key 2% level. For the dollar rally to continue we will need to see payrolls remain above this important level for the long-term.
GBP's credentials as an anti-growth currency
So why the big move lower in the pound? We think there are a few reasons: 1, the pound has turned into the anti-growth currency and is becoming more and more attractive as a funding currency. 2, The Eurozone crisis is still fairly stable, allowing investors to focus on the UK's weak growth prospects rather than the sovereign crisis the other side of the English Channel.
Looking at the first point: the pound as an anti-growth currency. Whereas the dollar has moved higher with bond yields, the pound has sold off even though Gilt yields have also moved higher in recent months. Whereas yields are moving higher in the US because growth prospects are picking up, this is not the case in the UK. Over here, yields are moving higher as investors shift out of UK government debt as Eurozone sovereign fears subside and after the UK was stripped of its triple A credit rating. None of this is good news for the pound.
The Bank of England may have kept rates steady when it met last week, but it may be a brief respite and the decline in the pound since Thursday's meeting suggests that the market believes further easing is waiting in the wings. We think next week's BOE minutes (released Wednesday 20th March) may show that the decision came down to the wire and will vindicate the pound bears.
So where could it go from here? As we mention above 1.4870 is acting as key short-term support, while 1.45-46 is a longer-term support level from June 2010 that we think will be tested once more in the coming weeks.
Chinese economic weakness could weigh on the Aussie
Elsewhere, there is no data out during the US session, so the market will digest Friday's payrolls and also the weaker than expected Chinese data. The market has to decide how it will react to a strong US versus a slowing Chinese economy. This may be bad news for AUDUSD, which we believe could re-test 1.0150 in the coming days. This is a key support zone and the bottom of the long-term range in this cross.
USDJPY has managed to hold onto gains above 96.00, after hitting resistance at 96.55 on Friday. The hourly MACD has flattened a little, suggesting that we could be flat-lining for a little while as the market adjusts to this move higher. We think there is continued weakness ahead for the yen, and the daily MACD suggests there could be further upside for USDJPY. We tend to think that this cross will move on the back of the USD side of things rather than the JPY side of things in the coming weeks; however BOJ governor nominee Kuroda is testifying to Parliament again this week and he is expected to reiterate his dovish credentials. This could keep a lid on any yen recovery in the short term.
One to watch: GBPUSD - the anti-growth currency.
Whereas USD has been moving higher alongside rising Treasury yields, the pound has been moving in the opposite direction. This suggests that Gilt yields are not moving higher on the back of improved growth prospects for the UK, and we could see continued pound weakness even if Gilts climb higher in the coming weeks. We also believe Gilt yields will be capped as the market continues to expect some aggressive, and timely, action from new BOE governor Carney, which spells further GBP weakness, in our view.
Source: FOREX.com and Bloomberg
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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