Sterling Shines While Euro Stalls in Front of $1.20

Sterling Shines While Euro Stalls in Front of $1.20

- in Currency, Insight, Markets, Monetary Policy, Outlook



Sterling Shines While Euro Stalls in Front of $1.20

by Marc Chandler

(The next leg of the business trip takes me to Frankfurt. Sporadic updates will continue)

Sterling has extended yesterday's gains scored in response to the slightly higher than expected August CPI. It is trading at its best levels since last September. Chancellor Hammond's suggest that the UK will seek a transition period that is essentially an extension of the status quo fans hopes of a softer Brexit and this is also seen as supportive for sterling.

The August employment data is awaited. The main issue here is not job growth per se. As has been the case in the US and Japan too, job creation in the UK appears fairly healthy. The problem is the limited wage growth. This is arguably a more acute issue in the UK because of the rise in inflation, which saps the purchasing power of households. The Bank of England's Monetary Policy Committee meets tomorrow. At full force, now that a new Deputy has been named, a 7-2 vote is expected in favor of standing pat.

We have been identifying the $1.3430 area is a reasonable technical target for sterling. It represents the 50% retracement of sterling's losses since the day of the referendum June 2016 when it briefly traded $1.50. Also helping sterling is the unwinding of short cross positions against the euro. The prospects that the ECB tappering, which some participants had seen as urgent due to the self-imposed rule on the asset purchases, now appears to be a more prolonged process that could persist well into 2018, may have encouraged some profit-taking.

The euro poked through GBP0.9300 in late August amid calls from many investment houses for a move to parity. At the peak, it had moved beyond its upper Bollinger Band (two standard deviations above the 20-day moving average). In the first part of September, the euro has pulled back 3.5% against sterling and is now moving below its lower Bollinger Band. The low for the cross this year was reached before the French elections in April near GBP0.8315. The GBP0.8930 area represents a 38.2% retracement of the four-month rally. In addition to the violation of the lower Bollinger Band, the slow Stochastics are showing preliminary signs of a bullish divergence for the euro.

US 10-year Treasuries fell for the second session yesterday, lifting the yield to a two-week high near 2.17%. Before last week end, the yield brief traded near 2.03%. Similarly, the 10-year German bund yield jumped from about 29 bp before the weekend, a two-month low, to over 40 bp yesterday, a three-week high. It stalled there and is slipping a little today.

The rise of yields had helped lift the dollar from JPY107.30 that had been approached before last weekend above JPY110. However, with yields stalling, the dollar is trading in narrow ranges as the momentum eases. The high from late August was seen near JPY110.65 and this offer a nearby cap. We peg initial support near JPY109.40.

The euro recovered from its push toward $1.1925 yesterday to trade nearly $1.20 in Asia. Although it has stalled there in early European turnover, the market does not appear to have given up. We suspect that it can push toward $1.2020 before some of yesterday's bottom pickers take some quick profits. The next key technical objective we have noted is found near $1.2165, the 50% retracement of the euro's slide from the mid-2014 high.

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About the author

Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting firms and global investment banks.

Officially, Marc Chandler is Global Head of Currency Strategy, Brown Brothers Harriman since October 2005. Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank.

Disclaimer

Opinions expressed are solely of the author’s, based on current market conditions, and are subject to change without notice. These opinions are not intended to predict or guarantee the future performance of any currencies or markets.

This material is for informational purposes only and should not be construed as research or as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. Further, this communication should not be deemed as a recommendation to invest or not to invest in any country or to undertake any specific position or transaction in any currency.

There are risks associated with foreign currency investing, including but not limited to the use of leverage, which may accelerate the velocity of potential losses. Foreign currencies are subject to rapid price fluctuations due to adverse political, social and economic developments. These risks are greater for currencies in emerging markets than for those in more developed countries. Foreign currency transactions may not be suitable for all investors, depending on their financial sophistication and investment objectives. You should seek the services of an appropriate professional in connection with such matters.

The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete in its accuracy and cannot be guaranteed.

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