Currency Markets Remain Range Bound

British pound jumpy over Brexit

Currency markets remain range-bound, with volatility being led by sterling as it bounces around on Brexit trade talk developments and rumours. The dollar index was barely changed overnight, rising just 0.19% to 90.96. The US dollar has retreated this morning in Asia though, after the Mnuchin stimulus proposal, the dollar index falling to 90.86. The December low of 90.50 remains the critical support level for the index.

Today, the US dollar has edged lower against the G-10 and Asian regional currencies, reflecting renewed fiscal stimulus hopes. Momentum remains weak though, and the price action points to more consolidation of the recent US dollar gains for the remainder of the week. A breakthrough on Capitol Hill is likely to see the US dollar weaken once again on global recovery/rotation flows. Realistically though, currency markets may well be in a holding pattern until next week’s US FOMC meeting where I expect more easing and possibly some sort of yield curve control pivot. The latter would almost certainly spur more dollar weakness.

The ECB holds its monthly policy meeting on Thursday. I expect interest rates to remain unchanged, but for the ECB to ramp up its monthly bond-buying targets and potentially increase funding via its Pandemic Emergency facility or TLTRO’s. While additional easing could weigh on euro, the currency is more dictated by the US dollar outlook than ECB action itself. The ECB will set the scene for more of the same from the Federal Reserve next week.

With Brexit trade talks coming to a head this week—for the umpteenth time—sterling will continue to trade in a volatile 1.3200 to 1.3500 range. British Prime Minister Johnson is scheduled to hold a meeting with European Commission President Ursula von der Leyen in an attempt to break the logjam. Depending on the Boris-Brussels outcome, GBP/USD could well start with a 1.2 or a 1.4 by this time next week. I will not second-guess the road to that outcome though.

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