Daily Brief – Playing it safe

Playing it safe

The void created by the Euro’s retreat must be filled by other currencies somewhere. The foreign exchange market, unlike virtually every other global market, does not have the luxury of seeing one asset quoted in terms of a monetary value. Instead, one nation’s money is quoted in terms of another nation/region’s money. The vacuum being created by receding EUR demand must be immediately expressed in the spot valuations of other currencies. Crucially, those other currencies do not benefit from the fallout of souring Euro-sentiment equally. As a result, prices can become stretched in many currency pairs, even where the Euro does not take the place of the base or term. This briefing focusses on GBPUSD being one of those pairs.

Much of that weakness has been expressed against the Dollar. The trade-weighted index and that which you see quoted in the charts of our daily brief every morning shows us just how important the Dollar is to the perceived value of the Euro. Over 50% of that perceived value in such indexes can come directly from EURUSD with the pair also responsible for around a quarter of daily FX trading. It is understandable therefore that EURUSD gained in excess of 4.5% since Euro sentiment first began to sour at pace in mid-September. The pair today holds onto the vast majority of that gain.

Aside from the Dollar, the Pound has also been a significant beneficiary of a collapse in Euro-sentiment. As a result of that favourable flow into GBP, many Sterling crosses are now approaching significant resistance levels. The Pound has been the second best performing G10 currency in the past week and now cable is battling with heavy technical resistance levels. The gains in GBP have been made possible by a combination of favourable economic data (primarily jobs and inflation) as well as building expectations that the autumn budget will be played safe by the chancellor. Any change to that assumption or questioning of strong BOE pricing could cause the Pound’s rally to fail as it approaches key moving averages.

Discussion and Analysis by Charles Porter

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