In G10 FX this week, the focus falls on the GBP, USD, and EUR, with the fundamental drivers being the Third Brexit vote, the March FOMC meeting, and European PMI.
I explore the expected moves on the week in major currency pairs, which are derived from implied volatility. This expected move is a reflection of traders reviewing all known event risk and making an assessment on whether they see big moves in the currency. This is incredibly important, even for the staunchest technical and price action analyst, as it plays into the assessment of risk and therefore position sizing.
As we can see from the price matrix, it’s been a quiet open in Asia. The feeling on the ground is that the move in EUR/USD still has upside risk, notably as the speculative trading community is still net long of USDs. Of course, the weekly Commitment of Traders (COT) report is a few days old, and in FX terms that is a lifetime. However, it can still be a consideration as part of a holistic assessment of probability.
The March FOMC meeting could promote some USD activity, and one consideration is whether the Federal Reserve go some way to meeting the 16bp of cuts that are priced in over the coming 12 months, or the 21bp of cuts priced through 2020. This pricing looks fair, and I touch on this in the video, but aside from changes to the bank’s economic projections, I feel the Fed are reasonably content with how financial conditions have evolved since December and would be keen not to rock this boat. It seems unlikely the Fed meeting should be a strong volatility event.
Another factor, which should be a consideration, but one would never position for this in isolation, is the USDs seasonal pedigree. As we can see from the Bloomberg chart, the USD index (USDX on MT4/5) tends to struggle through March/April, and we are in a period of seasonal weakness for the greenback. Obviously, wait for the technicals and price action follows suit and gives us the clarity we are in for a re-run.
Brexit focus
The mid-week third Brexit vote will again get increased attention from clients, as it is last chance saloon for Theresa May. According to the betting markets, the vote seems likely to fail again, with a 35% chance of passing, although it will be far closer this time around. Consider Philip Hammond (the UK Chancellor) stated over the weekend the government might delay the vote should it look destined to fail.
Wednesday morning (in Asia) could, therefore, be another volatile period, so watch positions here and manage exposures accordingly. Aside from elevated volatility, we can see positioning is fairly neutral, as is the case in GBP/USD 1-week risk reversals. As we can see in the Bloomberg chart, small GBP net longs are held by both speculative (think hedge funds) players and asset managers, although with GBP/USD now nudging 1.33, one suspects the fast-money traders will be running a small net long position now.
EUR/USD focus – green shoots emerging?
In the video, I focus on EUR/USD, which has found buyers of late and if the implied move on the week is anything to go off then fading rallied into 1.1415/20 looks a higher probability trade through the week. All eyes fall on Friday’s European PMI data, and as we can see there are signs of ‘green shoots’
As the chart from Morgan Stanley (NYSE:MS) shows, the EU follows China data closely, and we are seeing between signs in the forward-looking new export orders that stability is entering the mix.
We can also see the Citigroup (NYSE:C) economic surprise index (white line), which has started to turn up showing data is beating expectations. I have overlapped EUR/USD against this. Perhaps this is another sign that we could be in for better trend in EUR/USD. The PMI data will offer new insight and could be another reason to be a buyer of the DAX, which is a chart I posted on Friday. Keep an eye on the calendar.
