Many FX crosses observed volatility yesterday based upon the words of decision makers at scheduled speeches. Words from policy makers at the Bank of England and the European Central Bank in particular caused significant shifts in spot prices and liquidity conditions within major pairs including EURGBP, GBPUSD and EURUSD. Whilst the words offered to the market regarding the expected path of respective central bank policies brought spikes and gaps in prices, they were short lived, failing to deliver these currency pairs to new ranges. As we approach key decisions from the ECB, Fed and BoE over the next couple of weeks, yesterday serves as a reminder of the surprises that can be delivered by even peripheral members of rate setting committees as well as the data-driven trading we have become accustomed to.
Governor Bailey’s was that Sterling moving voice yesterday. His comments at a scheduled late afternoon speech left markets with the flavour that the Bank of England already was or had almost finished with its hiking cycle. With two rate hikes still priced into the UK’s curve, the tone of Bailey’s speech was sufficient to threaten this pricing. It was unsurprising to see a test of the 1.25 level in GBPUSD yesterday given this pricing adjustment within fixed income. With cable on the back foot, there is limited technical resistance below the psychological 1.25 level meaning a sustained break of this level, as we are currently seeing in this morning’s trade, could incite a weaker GBP.
Unfortunately for the US Dollar, many rate setting members are due to speak later today. The release of the ‘beige book’ last night which publishes the Federal Reserve’s latest survey of regional business contacts showed a relatively downbeat assessment on the US economy. Following the ISM data a few hours earlier, that is perhaps not surprising. The publication was read as good news for inflation but potentially troublesome to still-sanguine growth outlooks. No fewer than four Fed policy makers are scheduled to speak today so traders will beware sudden headline-driven price swings.
Discussion and Analysis by Charles Porter
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