In our FX review this week, we run through the risk-off move in the early part of the week, underperformance in the British Pound and our latest trade ideas.

Jitters passing into FX

Markets had major jitters in the first couple of days in the week. This move didn’t begin in FX markets, but was passed on through via both equities and bonds. For example, the NASDAQ had it’s worst day since March on Tuesday, selling off almost 3%. Other indices printed in the red as well, with riskier stocks feeling the brunt of the move.

Investors were also selling out of bonds, causing yields to rise. This allowed the US 10yr yield to rise above 1.5%. The flow through to FX was mostly due to the higher yield on offer. This saw investors rush to buy USD to benefit from the carry trade. In terms of selling, the big underperformers were GBP, AUD and JPY.

We’ve spoken for several weeks in our FX review about a lack of ranges being broken, limiting potential trade ideas. This wasn’t the case last week, with several USD pairs breaking to new highs/lows. For example, USD/JPY touched 112 and GBP/USD got close to the 1.3400 barrier.

GBP having a wobble

Following on from the USD bid story, underperformance was seen at home for GBP traders. Issues with fuel shortages and supply chain disruption for retailers saw a cloud hang over the currency for much of the week. This was reflected in GBP losing ground against most major peers. With the USD also well bid, a lot of focus was on GBP/USD.

From starting the week comfortably above 1.3700, it dropped like a stone to make fresh year-to-date lows late on Wednesday at 1.3449. With some consolidation on Thursday, the pair bounced to close the week just shy of 1.3550.

In our QuickPicks note, we went long GBP/USD at the 1.3500 level, with several technical indicators flashing the sudden drop as being oversold. We are looking for a move back to the levels seen at the start of last week before taking some profit, but like holding the position for the long-term.

Using EUR as a hedge

In terms of other ideas, we do note a break of 1.1600 on EUR/USD. The pair closed the week just below this level, at 1.1593. Given the likelihood of diverging monetary policies from the ECB and the Fed into 2022, we think the pair could continue to head lower. Being short EUR/USD also helps to act as a hedge against our long GBP/USD trade in case we continue to see US yields rise in coming weeks.

Overall, a busy week in the FX space, with finally some tangible volatility enabling trading ranges.

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