Ranges holding as pressure mounts

Sterling range narrowing

It is often the case when a currency is hemmed in to a narrowing range, as trader’s form opposing views of the factors affecting its direction, that when the breakout comes it is rapid and violent.

The pound has now become seemingly becalmed between 1.4020 and 1.4080 versus the dollar with fears over Brexit holding it back and hopes for a rate hike providing support. It has tested both ends of the range with no real success. Versus the single currency the pound continues to close in on its high for the year as the Euro exhibits weakness.

It seems that with almost two weeks until the release of the inflation data for March traders see that as being the vital cog that will determine the Bank of England’s actions at the MPC meeting next month. It is hard to imagine the current range holding for that long but the other major events affecting the UK currently; the diplomatic wrangle with Russia over the use of nerve agent on a former Russian agent living in the UK and the ongoing Brexit negotiations, have taken a back seat while economic developments drive the currency.

The second quarter is likely to be dominated by the rate hike, its aftermath and by the final Brexit agreement but in the short term monetary policy is continuing to provide short term direction.

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Dollar still caught up in trade war concerns

The first week of the new quarter has been dominated by short term concerns over a full-blown trade war breaking out between the U.S. and China. Following President Trump confirming a 25% tariff on U.S. steel imports then giving out exemptions to several “favoured” countries, China has reacted by acting similarly over a number of items imported by China from the U.S.

Most notable has been scrap aluminium but certain other products have had the side effect of boosting other currencies most notably the Australian dollar since Australia is expected to benefit from restrictions on the import into China of American wine.

The dollar index has hardly registered the concern this week as it has mostly managed to stay above the 90.00 level, but this has also been a week for a narrow range. The index’s major component, the Euro has been trading close to its major support at 1.2260 so unless that breaks the dollar index is also close to its top.

With tomorrow’s U.S. employment report looming the dollar will move to front and centre as the data could provide more questions than answers about the Feds three or four hike strategy.

Euro weak on ECB dovishness.

The ECB won’t have been encouraged to change its stance over monetary policy and the future direction of interest rates following yesterday’s release of inflation data for the Eurozone which was at the bottom end of expectations. Today sees the release activity indexes which are expected to remain firm if unspectacular.

Year on year inflation remains at 1.4% still well below the ECB’s target of 2%. Month on month it fell back to 1% from 1.1% in February.

The Euro continues to trade close to the bottom of its medium-term range but no new drivers on the horizon it is unlikely to break lower without some outside influence from the dollar. It managed to briefly rally above 1.2300 yesterday but quickly fell back to close at 1.2277.

Traders are now looking with interest at the 0.8650 level for the Euro versus Sterling which equates to around 1.1550 for the Gbp/Eur cross. If the pound can hold above that level, then the multi-year high at 1.1900 could be tested long term.

Pressure is building in the market as ranges narrow and it is rare for the market to remain in the doldrums for long given the multiple drivers that affect currencies.