GBP/JPY, GBP/USD in Vulnerable Positions; EUR/GBP Looks Higher
- With Brexit bill debates underway in UK parliament, fears of a 'hard Brexit' outcome are weighing heavily on the Sterling.
- DXY Index nudging higher with rate hike odds stable: 96% chance for March; 72% chance for September; and 54% chance for December.
It's a quiet morning on the DXY Index front, as traders and investors alike wait on Friday's US Nonfarm Payrolls report (which I'll be covering live - register here) to get one last confirmation that the Federal Reserve will hike rates at their March policy meeting next Wednesday. Since Fed Chair Janet Yellen spoke on Friday, interest rate expectations have been quite stable, with the odds of a first hike this year in March holding steady at 96%, the odds of a second hike this year in September steady around 72%, and the odds of a third hike this year in December hovering near 54%.
While the timing of rate hikes has been pulled forward from June & December to March & September, we're still not confident that markets have fully priced-in a third rate hike just yet; if December clears 60%, we'll be more comfortable with making that call. Historically speaking, the Fed hasn't hiked rates at any point over the last 21-years unless the front-month Fed funds futures contract was pricing in at least a 60% chance of a hike the day of the Fed meeting, so for now: close, but no cigar.
With NFPs drawing everyone's full attention, the odds of rate hike odds moving before then seem low (particularly now that we're in the blackout period before the FOMC meeting), so DXY Index may just meander around before then. Certainly, it seems that if DXY Index moves significantly between now and Friday, it will be due to exogenous forces like the ECB rate decision (which I'll also be covering live - register here).
Elsewhere, our attention is drawn to the increasingly slippery British Pound, which is back under pressure today as news around Brexit and UK data otherwise have been disappointing. UK retail sales slumped again as it appears consumers are tightening their purse strings ahead of an uncertain future thanks to Brexit. As the Brexit bills make their way through UK parliament, it is looking more and more likely that a 'hard Brexit' scenario will unfold: two years of contentious negotiations between the Theresa May-led UK government and the European Union, before resulting in a hasty split that leaves little will for cooperation on either side.
This leaves several GBP-crosses in less-than-ideal situations, from a technical perspective. GBP/USD's bearish momentum profile (price below the 8-, 13-, 21-, and 34-EMAs, MACD trending lower below the 0 signal line, and Slow Stochastics trending lower below 50) has crystallized in recent days, suggesting a retest of the 1.2025 area may be due. EUR/GBP has worked its way through a short-term bullish falling wedge, and has now started to challenge the downtrend from the October 7 (flash crash) and January 16 highs. GBP/JPY is close to breaking through the February 7 swing low, which could point to the next leg of a 200-pip-plus decline into its triangle base near 136.45.
Webinar Schedule for Week of March 5 to March 10, 2017
Monday, 7:30 EST/12:30 GMT: FX Week Ahead: Strategy for Major Event Risk
Wednesday, 6:00 EST/11:00 GMT: Trading Q&A
Thursday, 6:00 EST/11:00 GMT: Central Bank Weekly
Thursday, 6:00 EST/11:00 GMT: Live Event Coverage: ECB Rate Decision
Friday, 8:15 EST/13:15 GMT: Live Event Coverage: US NFPs
--- Written by Christopher Vecchio, Senior Currency Strategist
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