The Fed maintained status quo as expected and kept the benchmark fund rate in a range between 1.5% and 1.75%, while slightly bumping the rate on excess reserves to 1.6% from 1.55%. The decision was unanimous amongst Fed members. Language was little changed, with emphasis remaining on the 2% inflation target. USD faded strongly into the weekend, however; to start the new five day frame the dollar recouped most of Friday’s losses, with it rallying the most against sterling by a margin of 1.5%. In our view, risk remains skewed towards a broadly stronger dollar.
On Friday, the January jobs report will be released. The U.S. economy is expected to have added 150k jobs for the month, as per the Bloomberg consensus estimate. We expect it to be a non-event as per usual – it will likely take a material miss, or series of large misses to rock the boat and become the volatile data release it once was.
The BoE kept rates unchanged at 0.75% by a 7-2 vote. The market was pricing in a roughly 50% chance of a cut. GBP/USD rallied over 1% from the release of the decision into Friday’s close. But tough post-Brexit trade negotiations sparked enough selling yesterday to wipe out all gains from Thursday/Friday and then some. Up until the end of last week, price action had been ho-hum in the wake of the spike-and-reverse surrounding the general election. Now that the six-week-long quiet period is giving way to volatility we expect larger price fluctuations to continue.
There is big support around the 1.2940/1.3000-area. A full breach of support is seen as putting cable at risk of losing another 2-3% in the near-term. Despite the short-term risks, ‘Brexit’ clouds beginning to disperse provides longer-term reasoning for holding a favourable outlook for sterling on a relative basis.
GBP/USD Daily Time-frame: Threatening more volatility
The euro has support around the 1.1000-line; however, strength is difficult to trust these days. EUR/USD is generally stuck in a longer-term down-trend, evidenced by the fact that it has traded beneath the 200-day moving average all but two weeks since mid-2018. A break under 1.1000 is seen as leading EUR/USD to a test of multi-year lows under 1.0900. There is no significant data on the docket this week.
The RBA held rates at 0.75% as expected, but it wouldn’t have been a total shock with the market pricing in about 25% odds of a cut ahead of last night’s meeting. AUD/USD has significant support around the 6.700/6.670-area. We’ll see if it can stabilize here in the near-term, but the longer-term trend remains pointed squarely lower.
The Japanese yen threatens to rally further as global stock markets, economic-sensitive commodities, and rates continue to weaken on the coronavirus. The Chinese government is providing liquidity to help stem a panic in financial markets, and is seen as doing whatever is necessary to stabilize the situation. However, there still remains plenty of uncertainty in the near-term, keeping risk titled towards more yen gains on further souring in risk sentiment.
FX volatility is rising, but is it only temporary? To start the year 52-wk volatility in the US Dollar Index (DXY) declined to its lowest levels since 1978. For now, currency volatility is just starting to come up off the floor, but relatively soon we expect to see an uptick spawn into a full-on regime change. Over the next 12-24 months a reversion back to the long-term mean looks to be on the cards.
Anticipating a return to higher volatility to develop this year
In summary, eyes will be on whether January’s late pop in volatility will become a trend. Much market attention will remain on the coronavirus for the foreseeable future. Friday’s US jobs report is set to be another non-event. Rocky trade negotiations put Cable at further risk, with near-term risks of losing 2-3% in the short-term. Any EUR/USD gains from here are likely to be transient, with new cycle lows under 1.0879 seen as yet to come. Aussie may see a near-term recovery, but appears likely to remain weak in the longer-term. The bid in yen is set up to remain firm with markets in de-risking mode.
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