Decision day for UK and US


Good Morning, President Trump dominated the headlines and the market’s attention last week, as he returned to the White House much earlier than anticipated full of vim and vigour. The markets responded positively, and risk appetite returned which helped beta currencies such as sterling, which ended slightly better on the week at $1.2975.

There is still a slight question mark about his health and whether he is fully recovered, so currencies will stay jittery for the foreseeable future. Away from the health of the president and American politicking over fiscal stimulus, the overriding driver of the markets for sterling is Brexit. With the self-imposed deadline of the 15th October for agreement over a trade deal just a few days away now, we are expecting the markets to be extremely sensitive to Brexit headlines.

Looking forward, the focus this week will be on the EU summit on Thursday and Friday, which coincides with Boris Johnson’s deadline. At the time of writing, it seems extremely unlikely that an agreement will be reached by then and with Michel Barnier saying October 31st  is the “realistic deadline” an extension of the talks is to be expected, even if it is just to discuss how best to cope with a no-deal. We will also be watching how the second wave of COVID-19, both in the UK and Europe, develops. So far, the spread has been ignored, but the economic impact is still real. The harm already inflicted was reflected in last week’s economic data which was worse than anticipated both in the UK and America and sadly local lockdowns look more and more likely to increase as will the damage they inflict.

As mentioned, the week ahead is a big week ahead for sterling as we enter the end game on the Brexit negotiations, with the most likely outcome an agreement to continue negotiations into November. Sterling is sitting just on the key technical level of $1.3032* which many feel is the middle of its trading range, reflecting a 50/50 chance of a no-deal. If there are any truly positive signs of a breakthrough, the pound would break this level and rapidly appreciate. The pound has been holding steady around the €1.1000 level, but this week we expect to see a little more movement. With economies both in the UK and Europe set to suffer more from COVID-19 induced restrictions, the pressure is firmly on both sides to agree to a compromise and increasingly the market senses that a resolution will only come from direct intervention from the key players involved, namely Angela Merkel, Emmanuel Macron and Boris Johnson. The focus on the data front will be the release of unemployment data on Thursday, which is expected to be gloomy as we approach the end of the main furlough scheme. The only scheduled noteworthy speech is from BoE Governor Andrew Bailey who is speaking late this afternoon.
*50-day moving average

The euro enjoyed a relatively stable week against both sterling and the dollar, despite the verbal interventions of the ECB to try and talk the single currency down. We expect to see more jawboning from ECB officials especially when the currency approaches $1.2000 which appears to be the level that concerns the central bank. In the coming week, the main story will be Brexit and naturally what is good for sterling will be good for the euro as both sides equally need a deal. Christine Lagarde is scheduled to speak late this morning and again on Wednesday but apart from that, it’s a quiet week until the EU summit on Thursday and Friday. The only major data of note is from Germany where the Consumer Price Index is released Tuesday as is the latest ZEW economic survey.

Today is Columbus Day, a national holiday in the US, so we are expecting a very quiet start to the week. Over the weekend Donald Trump made a public appearance at the White House and was declared COVID-19 negative. Despite the clean bill of health surprisingly the second presidential TV debate has been cancelled. As the election looms ever closer, politics and Donald Trump’s health will naturally continue to dominate the headlines. With the opinion polls now suggesting a clear win for Joe Biden, the risk of the result being contested is receding which will support riskier currencies and suppress the dollar. On the data docket this week we have inflation figures released on Tuesday, jobless claims on Thursday and retail sales on Friday.

Towards the end of last week, we saw some hefty movements in the krona caused by the global switch in risk assessment. Speculation has increased in Sweden about the Vänster Partiet (the left-wing coalition partner of the ruling Social Demokraterna party) joining the opposition parties in a vote of no confidence in the government. Should this happen, the fragile coalition would falter, and new elections would have to be held. This unstable political situation will most likely dominate movements in the krona from a macro-perspective the coming days. We will also be keeping a close eye on the CPI release on Tuesday and the unemployment rate out on Thursday.

The Norwegian krone has recouped some lost ground in October and is back trading at levels last seen in mid-September against major crosses. With no major data releases out this week, we will be monitoring the oil price as it has a direct effect on the oil-exporting country’s currency.
We rarely mention the Danish krone since it is pegged against the euro, making it easier to just follow the euro’s movements, however, it is worth noting that the EURDKK is currently trading at its lowest level since 2018, even though EURUSD is currently near its highest level since 2018.

In common with other G10 currencies, the Japanese yen remains beholden to moves by the US dollar and as a safe haven currency, it will benefit from any political fallout in America during the run-up to the election. The aussie dollar will be dominated by two events in the week ahead, firstly the speech from RBA Governor Philip Lowe on Wednesday ahead of the employment data which is due on Thursday. With the RBA stating the importance of jobs to its policy stance, it is unlikely that any surprises are in store. The kiwi will remain dominated by domestic politics with the general election on the 17th October which the incumbent is expected to win. As always, the Canadian dollar will be following its southern big brother but may gain some strength if oil stays relatively strong.

What is a moving average?
A moving average is a popular technical analysis tool. Moving averages are usually calculated to identify the trend direction of a currency or to determine its support and resistance levels. It is a trend-following indicator because it is based on past prices. The longer the time period for the moving average, the greater the lag and the greater the influence. So, a 200-day moving average will have a much greater degree of lag than a 20-day MA because it contains prices for the past 200 days. The 50-day and 200-day moving average for currencies are widely followed by investors and traders and are amongst the most important trading signals. As they are so closely followed, they can become self-fulfilling prophecies and when a currency breaks through a moving average many investors will follow the move.