[MKT] FX Strategy - GBP and USD under pressure
There is a fair amount of US data on Wednesday which should determine whether EUR/USD holds in the 1.08-1.10 range or breaks higher. The US manufacturing numbers have not been particularly encouraging since the FOMC with industrial production, the Markit PMIs, the Philly Fed index and the Chicago Fed national activity index all on the weak side of expectations, and US long term yields have actually edged lower since the FOMC. However, they have fallen less substantially than yields in the Eurozone, so the T-note/bund spread has moved slightly in the USD's favour, though not so much as to suggest scope for a move below 1.08. For now we are likely stuck in a 1.08-1.10 range, but the risks are to the upside until or unless we get better US numbers, with durable goods orders probably the most significant release on Wednesday.
The biggest mover on Tuesday was GBP, which continued to suffer across the board after a disappointing PSNB for November. In reality, this number makes no difference to rates or policy, but GBP needs good data to prevent weakness at this point, as the market is very much gearing up for a GBP sell off in anticipation of a referendum on EU membership. With declining confidence in an early UK rate hike due to slowing wage growth, there is little to protect the pound unless the data starts to suggest reasons for higher rates, and although Wednesday's final Q3 GDP data should be a reminder that the economy is ticking along reasonably well, it isn't enough to change the weak GBP tone. However, we are approaching the bottom of the daily channel in GBP/USD, so it is hard to be an aggressive seller while the USD is generally soft, though we would see bounces towards 1.50 as a selling opportunity, and on better US numbers GBP/USD may in any case be the easiest sell. EUR/GBP broke above 0.73 on Monday and reached 0.74 on Tuesday and looks set for further gains medium term unless the UK data improve sufficiently to re-ignite the prospect of an early rate hike.
Our favoured currency remains the SEK, with more evidence of the strength of the economy emerging on Monday with the economic tendency survey (the best indicator of GDP) rising sharply once again to another new post 2011 high, suggesting the Q3 growth rate of near 4% y/y may even accelerate in Q4. The National Institute economic forecast also raised GDP growth for 2016 to near 4%. Tuesday's retail sales data also showed a whopping 5.2% y/y gain. The SEK has gained modestly, but may have much bigger gains to make medium term, though for now Riksbank resistance to SEK strength limits the upside, especially against a strong EUR.