FX market outlook

FX market outlook

Pound trade “chaotic” after it breaks through major levels; currency rebounds later

The British pound plunged to as low as 1.1378 against the US dollar during early Asian trading only to rebound to around 1.24 on worries that a “hard” Brexit would damage the UK economy.  After the pound broke through 1.26, 1.25 and 1.24, the floor seemed to disappear and there were no buyers in the market – possibly as a result of aggressive algorithmic trading.  The incident also happened while Asian trading conditions were relatively thin.

Euro / pound also rallied to 0.9365 before coming back to 0.8924, which is a 5-year high for the euro.  The French President Francois Hollande said that the European Union needed to take a firm stance against the UK after the country seemed to choose a tougher exit from the bloc.  UK Prime Minister Theresa May spoke against ultra-loose monetary policies the previous day, which opened up the possibility of a rift between the Bank of England and the government during a particularly sensitive period for the UK economy.

In economic data, the recent string of strong data out of Germany continued with the release of stronger-than-expected industrial output for August.  Output was up 2.5% month-on-month during Europe’s traditional holiday month compared to expectations of a 0.8% rise.  Earlier, Chinese foreign exchange reserves fell a bit more than expected to $3.166 trillion in September from $3.185 in August – a drop of around $19 billion.  China is still seen to be intervening to slow the decline in the yuan, but at a slower pace compared to the previous year.

Euro / dollar was also lower – possibly dragged down by sterling’s woes – to 1.1112.  The dollar remained relatively strong versus the yen as it traded at 103.93.  The dollar was well bid ahead of today’s employment report out of the US which is expected to show that a net 175 thousand jobs were created during September.  Strong economic numbers out of the US this week, combined with some relatively hawkish comments from Fed officials have emboldened dollar bulls.

Looking ahead, house prices and industrial output out of the UK will provide some fresh clues on the British economy, whereas together with US employment numbers, the Canadian employment report will also come out.