This week saw higher volatility in most major FX pairs, with risk sentiment being soured as the week progressed. In our FX review for the week, we mainly focus on developments on GBP/USD and EUR/USD.
The FX week in review
The main drivers for the risk-off move was the escalating situation in Afghanistan. The evacuation is continuing as planned but as the market digests the longer-term implications of a Taliban controlled Kabul, it doesn’t sit well.
Add into the mix the news seen this week with Covid-19 cases. Here in the UK, the seven day rolling average of case numbers has been rising. New Zealand went into a fresh lockdown on Tuesday following a confirmed case. In Australia, New South Wales reported the worst day so far for the pandemic in terms of numbers.
The above meant that we saw the USD well bid throughout the week, fuelled also by some relatively hawkish Fed minutes released on Wednesday. It is becoming more evident that the start of tapering of asset purchases is likely to kick off before this year finishes. Rate hikes still look a way away, but the market is clearly getting bullish signals from the rhetoric coming out from the FOMC.
Although the risk-off mood dominated the week, traditional safe havens such as CHF and JPY didn’t materially gain against their peers. On the flipside, it was the commodity currencies that felt the brunt. With oil moving lower too, NZD, AUD and CAD all struggled. With the Kiwi central bank holding off raising rates following the lockdown, NZD turned out to be one of the worst performers of the week.
Ideas from here
GBP/USD broke below the 20 and 50 DMA’s in the 1.38’s as we started the week. It continued lower, taking out horizontal supports from earlier this year in the 1.37’s before taking a run at the 1.3500 barrier on Friday afternoon.
It is flagging up as oversold on the CCI, and on the daily candles could offer an attractive buy of the dip. The downside could extend towards the July lows of 1.3570 early next week, but if this holds then the longer-term bull trend appears to be in tact with a double bottom forming.
On balance, we would prefer to be buying dips rather than chasing the move lower from these levels.
For EUR/USD, the picture is less clear. The July support around 1.1705 has been broken, with 1.1664 being traded on Friday. Given the divergence of monetary policy going forward and the yield outlook, we could easily see fundamentals push the pair lower.
From a technical point of view, bar some horizontal support around the 1.1615 level, the pair has a lot of room to extend losses down to the 1.1400 level.