Dollar U-Turns, GBP Crashes: Will The Reversal Last?

  • Forex Analysis

Daily FX Market Roundup March 21, 2019

Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The dovishness of the Federal Reserve should have been widely negative for the US dollar but instead of extending Wednesday’s slide, the greenback rebounded against all of the major currencies. Better-than-expected manufacturing activity in the Philadelphia region , lower jobless claims and an uptick in leading indicators helped fuel the u-turn but the Fed’s belief that accommodative policy is still needed in the face of stronger growth tells us just how deep their concerns run. USD/JPY also benefitted from the recovery in stocks but the rally should fizzle near 111 as Wednesday’s breakdown shifts the pair’s outlook. Aside from the central bank’s plans to keep interest rates unchanged for the rest of the year, US-China trade talks are going nowhere fast. The US will be sending Mnuchin and Lighthizer to China next week for more trade talks but with reports that President Trump wants China to double or triple its purchases of US goods, an agreement still appears far away. As such, the 111.00 to 111.25 area could be a great place to reload USD/JPY shorts.

Meanwhile, sterling fell by the largest amount this year versus the US dollar and not because of the Bank of England’s monetary policy announcement . The BoE voted unanimously to leave interest rates unchanged and said Brexit could prompt policy moves in either direction. It also warned that employment growth could moderate significantly as more companies trigger no-deal Brexit plans. Instead of falling, sterling rallied after the rate decision because the central bank said “gradual, limited tightening is probably needed.” UK retail sales also beat expectations, rising 0.4% against a forecast of a 0.4% drop. Unfortunately with Brexit in focus, nothing matters more than the European Union’s response to UK Prime Minister May’s request for a short extension until June 30, 2019. And they are not letting her off the hook easily. The EU’s Chief Brexit negotiator Michel Barnier wants the extension to be conditional on a positive vote, which means they either accept the current deal or exit with no deal. In doing so, the EU would raise the stakes but we still don’t know if that will be their official response. If it is, the British pound is in serious trouble. We’re looking at the strong possibility of an emergency EU summit next week, which will prolong the uncertainty and take GBP/USD well below 1.30.

The Swiss National Bank also left monetary policy unchanged. Like the BoE, there were no surprises. SNB President Jordan said he’s moderately optimistic this year but trade conflict, Italy and Brexit are risks. The rising dollar also took a big toll on the euro , which erased 70% of Wednesday’s gain. If Friday’s EZ PMI reports ( manufacturing , composite and services ) show ongoing weakness, we could see EUR/USD break below Wednesday’s low, which would completely alter the technical outlook for the pair. If the data is strong, it would reinforce the anti-dollar bias and take EUR/USD back above 1.14.

The Australian dollar also fell but held up better than its peers after the unemployment rate dropped below 5% for the first time in 8 years. Unfortunately, a large part of the improvement was caused by lower participation . Job growth also slowed to 4.6K after rising 38.3K the previous month. The New Zealand dollar , on the other hand, was the second-worst performing currency. Although GDP growth accelerated to 0.6% in the fourth quarter, year-over-year growth slowed to 2.3%, the weakest pace in 3 years.

USD/CAD shot higher erasing all of Wednesday’s slide. The loonie will be in play Friday with retail sales and consumer prices scheduled for release. The risk is to the upside because job growth was strong, wholesale trade rebounded in January and the price component of IVEY PMI increased. Still, the trend is to the upside and any disappointment, even if it is small, could send the pair higher.

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  • Nkosingiphile Bhuti @Nkosingiphile Bhuti
    what are we buying or selling today on forex digital?
    Like 0
    • Ezile Ncwasu @Ezile Ncwasu
      hi
      Like 0
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  • Mario Luthokile @Mario Luthokile
    Any signals about news
    Like 0