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Research Portal

Currencies’ outlook hinges on stock market action and fresh data coming in

Feb.12.2018 11:00 am Asia/Dubai
By Konstantinos Anthis , Head of Market Research
British Pound
Equities
Euro

Currencies’ outlook hinges on stock market action and fresh data coming in.

The major currency pairs are trading with a positive bias this morning after a week of elevated volatility that triggered a move towards safer haven instruments. The main theme remains the sell-off in equities as investors look to gauge whether the retreat in the stock markets is now over and their assessment will dictate the trading action over the next few days. All the major currencies came under pressure last week – with the exception of the US Dollar and the Japanese Yen that always gain when traders look for lower risk destinations – and key question now is whether they will be able to recover going forward. Apart from the stock markets’ behavior, there’s also a host of data coming our way: UK inflation and retail sales, Eurozone GDP and US CPI and consumer spending data are all scheduled for release this week so volatility will remain elevated.

Both the Euro and the Pound have retreated during February as the Dollar gained.

Euro and Pound present interesting trading opportunities in the short term.

The Euro and the Pound present a very interesting case at the beginning of the week after both currencies came under pressure from Dollar’s advance over the recent sessions. We believe that the two European majors will soon attract investors’ attention for the simple reason that they have both retreated considerably since February 1st but their fundamental outlook has not changed at all and still suggests a bullish bias. The Euro is supported by the impressive performance of the Eurozone and it has been further backed by ECB’s willingness to accept a more expensive currency this year. As such, the pullback to the 1.22 area presents a favorable risk/reward opportunity for investors that may look to buy the currency now with a view that it reaches 1.25 again.

At the same time, the Pound corrected all the way to 1.38 mostly on the back of Dollar’s advance but also following news that came out on Friday suggesting that the progress in the Brexit talks has been slow in recent weeks. What is interesting is that this bearish sentiment outweighed – in the short-term at least – the most important news for Sterling traders: the BoE clearly mentioned that they will look to raise rates 3 times during the next 3 years clearly hinting towards a hike over the next few months. This is an important shift in outlook for the Pound and one that has yet to be reflected on the currency’s price action so it is likely that as the risk-off bias goes away traders may look to buy the Pound again. The UK inflation reading tomorrow will be the key event and if prices’ growth edges higher it will be an important catalyst to spark a rally towards the 1.42 area once again.

Equities point higher at the beginning of the week but investors should remain cautious.

Stock markets look to start the week on a positive bias with the Asian bourses trading higher and European and US futures trending in the green. On Friday, the sell-off we witnessed during last week seemed to have eased a bit and this could suggest that a swing to the upside might be the next move for equities. A short-term move higher however should not carry us away to believe that the reasons behind the bearish bias in stocks have gone away. The bearish catalysts of higher bond yields and rising wage inflation are still there so we need to remain cautious – as investors will clearly do themselves. The first test for equities will be a test of their previous highs which could come over the next 48 hours and this will dictate whether a return to the upside is likely or whether the bears still remain in control.

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