Currency markets in choppy ranges

Pound jump as Brexit drama continues

Particularly in the G-10 space, currency markets made a lot of noise overnight for a minimal result. The dollar index bounced around in a 65-point range, but finished just 0.10% lower at 90.80. The two-year low at 90.50 remains the next significant support level, and a US stimulus deal should be enough to see it test that next week.

Much of the volatility was driven by GBP/USD, which fell from 1.3410 to 1.3225 on Brexit nerves; only to recover to 1.3375 when the Prime Minister announced he would head to Brussels to attempt to break the impasse. The financial markets are still pricing in practically a zero chance of a no-deal scenario. However, the fall-out on the pound will be emotional if that is proved wrong.

For now, 1.3500 seems to be a short-term top for sterling, with support at 1.3200 and 1.3100. Sterling could trade as high as 1.3800 on a Brexit breakthrough, but potentially reach 1.2500 if talks fail. The market is pricing the former; I am nervous about the latter. Unsurprisingly, I expect noisy headline-driven trading to keep volatility elevated until the gnomes of London and Brussels reveal all.

The Australian dollar traded in a 70-point range overnight but still finished near its recent highs, at 0.7420. Both it and the New Zealand dollar look poised to make fresh highs before too long. The same can be said for Asian regional currencies. The Chinese yuan, Thai baht, Singapore dollar, Malaysian ringgit, Philippine peso and Korean won all remain at, or very near, their highs for 2021.

In currency markets, the global recovery trade remains alive and well, particularly amongst the Asia-Pacific grouping. Currency markets are comatose in Asia today, but that does not mean dormant. If anything, the forex market appears to be girding its strength for a large move, with all the signs suggesting a weaker US dollar lies ahead.

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