Talking Points:
- The Bank of England managed to impress at its meeting; not in QE scale but in scope of efforts
- Pound drops in the monetary policy scale but bearish view versus Dollar, Euro and Yen may be limited
- Top Friday event risk is July NFPs with a high threshold for surprise and fundamental caveats for the Dollar, SPX
Having trouble trading in the FX markets? This may be why.
The FX market continues to rock and roll. Moving into the closing day of the week, traders are looking to the US payrolls release to see whether it can keep up the pace of volatility set by US GDP as well as the BoJ and BoE stimulus announcements. This past session, the Pound suffered a significant stumble with the Bank of England's rate cut, stimulus announcement and discouraging GDP forecasts. While the 25bp rate cut to 0.25 percent met economists expectations, the revival of the stimulus program to a £435 Bln was unexpected in scale and debated in concept. The further announcement of corporate bond purchases and a term-funding program to banks spoke to a more comprehensive package.
The switch in tack from the BoE - though expected to some degree - represents a significant change in fundamental tack. In response the Pound dropped between 1.5 (versus the Euro) and 2.2 percent (versus the Aussie Dollar) against its counterparts. Follow through, however, is a different beast altogether. This infusion helps to promote a sense of calm against financial instability, which can be interpreted after the shock wears off as a positive for the Sterling. Furthermore, against currencies like the Euro and Yen, the UK program is doesn't smack of the same desperation with controlled scale. Even GBP/USD may find limitations despite the widening policy disparity due to its proximity to multi-decade lows.
Ahead, the NFPs should be approached with an appreciation of the market conditions it is being released into. While FX markets are still very volatility and we are coming off very productive event risk, the surprise threshold has been set very high for the payrolls over the past two months. Meanwhile, the impact on risk trends and US monetary policy are shifting in importance, but they are also aligning. This will undermine some pairs' ability to react and potentially leverage others. And, as always, it is worth scoping out options that do not fall in the blast radius of such hefty events risk. We take stock of event risk and trading options in today's Trading Video.
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