FX Market Treads Water, Equity Rally Loses Steam

It was a quiet start to the week in the FX market, with the main currency pairs little changed. The US dollar lost ground against most of the G10 currencies. The Japanese yen was the best performer as it rose nearly 0.20% against the greenback to 100.80. Across the Atlantic, the pound sterling took a breather after falling almost 4% over the last three weeks, from 1.3445 to 1.2915.

On Monday, GBP/USD consolidated at around 1.2975. Even though we do not expect the UK to trigger article 50 before 2017, we expect that the market will remain cautious with regard to long GBP positions. Therefore, the bias remains on the downside with a first support at 1.2866 (low from August 15th), then 1.2798 (low from July 6th).

Now that the Federal Reserve has made clear its intention to stay sidelined until at least the end of the year, we have a hard time believing that the greenback will be able to recover lost ground. A fresh batch of US data is due for release this week and looking at the forecast, the market does not look very optimistic to say the least. Personal income is expected to print at 0.2%m/m in August versus 0.4% in July, durable goods orders are anticipated to contract 1.5%m/m in August compared to 4.4% expansion in the previous month, personal spending should print at 0.1%m/m versus 0.3% in the previous month.

Finally, the third estimate of Q2 GDP should show an improvement from 1.1% from 1.3%. Even though Mario Draghi will address a speech before the European parliament, we expect EUR/USD will be mainly driven by the release of US data and upcoming Fed member speeches. Overnight in Asia, the single currency was treading water at around 1.1230, the bias remains on the upside.

After tumbling roughly 5% on Friday, crude oil prices stabilised on Monday with the WTI trading at around $44.85 a barrel, while the international gauge, the Brent crude, reached $46.35. Prices will continue to be driven by speculations about a potential output freeze/cut by OPEC - and non-OPEC - members. The probability of a deal has never been so high with Saudi Arabia saying that it would cut production if other countries agreed to freeze output. However, it seems that the market has lost faith in a positive outcome after months of successful attempts. The risk is definitely skew to the upside as a surprise deal would trigger a massive rally.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Today traders will be watching the IFO survey from Germany; retail sales from Italy; ECB’s Coeuré will address in Rome; current account balance and FDI from Brazil; Fed Dallas index, new home sales form the US; Fed Kaplan will also speak.