Growth Fades, Risk Grows for EUR/USD, GBP/USD
- GBP/USD shocked by 'Brexit' headlines over weekend.
- As market volatility rises, it's a good time to review the "Traits of Successful Traders" series.
Once again, the individual components of the USDOLLAR Index are moving in different directions. It's important to examine their motivating factors as USD-centric influences are seemingly contradictory: markets are near-certain that the Federal Reserve won't raise rates in March, which may be helping buoy risk sentiment; yet markets are also more certain that the Fed will raise rates at some point this year (46% today versus 11% on February12).
In turn, we're seeing the commodity currencies perk back up (in particular AUD/USD) and the safe havens subside (USD/CHF and USD/JPY are higher on the day at the time of writing); but the European currencies seem to dancing to their own tune. Data and headlines from the weekend suggest that risks to growth across the European continent are, well, growing.
The 'Brexit' headlines in particular - which represent an existential threat to the idea of a unified Europea in the post-World War II era - have weighed heavily on the British Pound. While a Brexit was not our base case scenario heading into this year, the geopolitical risk it brought to the table was one of the cornerstones of our forecast for a weaker GBP/JPY in 2016. Currency Strategist Ilya Spivak's report on the Brexit headlines from this weekend is a quick, indispensible read for traders this morning.
On the Euro side of things, the rising growth concerns are not surprising as indicating in this week's Euro weekly trading forecast. Nor are the recent declines in the Euro: we have been skeptical time (February 12: "USDOLLAR Nears Major Technical Break; Don’t Trust the Euro"; February 14: "Further Euro Strength Suspect as Data Deteriorates; ECB Very Likely to Act").
If you read this week's Euro weekly trading forecast, you'll see the case I outline for a "buy the rumor, sell the news" type of situation unfolding in the EUR-crosses: markets are expecting the ECB to act in March, and have priced in another rate cut; but if the ECB only cuts rates a la the December 2015 meeting, the Euro could very-well rally the day of the March 10 meeting.
--- Written by Christopher Vecchio, Currency Strategist
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