heap of different nominal per dollars

In our FX review this week, we discuss the markets taking a pause after a busy couple of weeks, along with looking ahead to the last major trading week of the year. 

Calm with a hint of inflation

Much of the price action of the past week in FX markets has been uninspiring. After the initial concern around the Omicron variant at the beginning of the month, volatility has died down. Of note is that most of the moves haven’t retraced from the risk off dynamics seen in early December. Therefore, we conclude that the market is still unsure about the future, and is expressing this via being overweight USD, CHF and JPY.

However, there hasn’t been much of a carry through on these moves in recent days. With such a consolidation, we would normally look to take advantage of this by jumping on any pairs if they start to retrace. Yet with us being close to the end of the year, we’re mindful of taking on positions that would carry over to 2022. 

With thin liquidity and several bank holidays, we prefer to trade tactically over the short term for the remainder of the year. One good example of this was via the US inflation print out from Friday. It was released at expectations of 6.8%. It was always going to be hard to see a USD bid with expectations set this high, so even close to this number was likely to see USD sold off. Trading around the figure (we favored USD/CAD) was our strategy in the afternoon.

Big week ahead

Next week promises to be an important one, as we look to bring down the curtain on 2021. Both the US Fed and the Bank of England will be meeting for the final time this year. Added to this, we have a host of key data releases out for the UK, including inflation and unemployment rates.

We think that the Bank of England won’t raise interest rates, but think that this is broadly expected by the market. Therefore, the risk is likely of a bullish no hike, or a bearish hike, both of which would push GBP higher. We are going into the week long GBP/USD around 1.3300, but will be watching the position closely as the week unfolds.

It’s also worth noting that we are likely going to see a final flurry of volatility from the central bank meetings, as investors look to close out any remaining position for the year. This can often cause erratic moves, and so it’s worth not being overly exposed to FX during this time period. Even fundamentally sound trades can get distorted over the coming weeks!

Leave a Reply