Morning Brief – The parapet

Charles Porter
Tue 3 Oct 2023

The parapet

With high US yields and strong US data publications, it is not the time for currencies to stick their head above the parapet. Unfortunately for GBP, the attention that the Prime Minister is drawing to himself, and the conservative party conference, runs the risk of highlighting the political risk associated with GBP. With the current parliament certain to be dissolved in December 2024, the latest a UK general election could take place is Jan 2025. Is it highly common for an incumbent government to call the sovereign to dissolve parliament early if they see the political climate in their favour. Therefore, with attention being drawn to UK politics, markets could prejudice GBP in the knowledge that an election could be looming just around the corner. Whilst the debate surrounding the scrapping of HS2 should be a regional or national political concern at best, it sends the wrong signal for risk averse FX and fixed income markets.

Towards the end of last week, we did observe an encouraging reprieve from the relentless drive higher in US yields and the Dollar. As a result of the reprieve, the jury was out on whether the fractionally green candle sticks on the EURUSD chart in the last couple of trading days in September were just month end rebalancing flows or the reversal of the dominant near three-month trend in markets. Based upon trading patterns so far this week, it appears that any buying back of Treasuries and selling of the US Dollar at the end of September was as a result of month/quarter-end flows only.

It is no surprise that we are rapidly approaching key support levels within GBPUSD and EURUSD in particular. USDJPY, a pairing that continues to be punished with the Yen having declined by in excess of 17% year to date, has less visible resistance ahead. The lack of resistance in USDJPY until the highs of October ’22 are reached could encourage further US Dollar buying to extend bullish Dollar demand. Any reprieve to EURUSD swap points, a key driver of short term EURUSD spot pricing, during the month/quarter-end flows have also been closed offering more room for EURUSD to fall.

Discussion and Analysis by Charles Porter

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