Today, we see markets largely reverting to the major trend over the last month, with major currencies weaker versus the dollar. On a year to date basis, the dollar is the best performing currency out of the major currencies:

Interestingly, commodities have managed to perform coincidently with dollar appreciation, a typically unusual dynamic. However, this bid for commodities has not been supportive of commodity currencies, which we show using our Currency Bloc Monitor:

The dollar continues to suck capital out of major currency regions over the last month. The sum of these capital flows has resulted in an interesting mix between deflationary and inflationary market pricing. Markets are less and less pricing global deflation, from an elevated level earlier this month. At the same time, they are pricing in higher rates of economic growth. The sum of these signals means that markets are pricing in rising growth and falling inflation:

US stocks and global bond markets have been the primary benefactors of these market moves, with other stock markets lagging behind. Overall, we think this environment will continue in the foreseeable future, and current asset price moves are likely to trend further. In the backdrop, we received new data from the UK today, which likely assisted the GBPUSD weakness today- GBP composite PMI’s came in lower than expected. We think this might be symptomatic of things to come; our model projections have UK economic growth returning to trend soon:

If UK economic growth rates begin to slow further, we can expect data downside surprises to weigh on GBPUSD. While we were bullish on GBPUSD in the first quarter of this year, the monetary policy divergence between the Fed and BOE has largely closed. Therefore, we think that the current trend can continue to hold, i.e., GBPUSD weaker. However, this isn’t a high conviction/core view. Nonetheless, we provide our Trading Tools Report for your best judgment:

As a refresher on our lenses:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. Head to https://www.fxdd.com/mt/en to get access to our research and analysis! You need to know the fundamental developments in markets that are driving these moves promptly.