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FX: Narrow Ranges Continue To Characterise The Market

Published 08/03/2017, 08:42
Updated 09/07/2023, 11:31

Traders patience being sorely tested.

It is a long-known truism that, despite recent manipulation cases, the FX market cannot be successfully driven out of a state of flux once liquidity levels create equilibrium.

Despite several crucially significant matters either about to engulf traders now or on the horizon, narrow ranges continue to characterise the market.

Next week's Dutch election and FOMC meeting are eagerly awaited as is Friday's U.S. employment report but no one is willing to grasp the nettle and make the “definitive” call.

When the market is in such a state, order levels get drawn close to the current level giving the potential for a spectacular breakout and with the market very long dollars, a test of the downside stops, should there be a surprise in Fridays report, is on the cards.

Sterling is considering another flash crash abyss having been grinding slowly lower in the face of the realization that the economy is slowing and inflation growing. No one is mentioning “the S word” yet but since the Bank of England's hands are effectively tied the currency could see a quick and painful drop through 1.2000 and once that happens it is a matter of conjecture how low it can go.

The pound made a seven-week low against the euro yesterday. The single currency is taking a breather before the elections in the Netherlands and France. The Dutch vote next week in the first election of 2017 where populist/nationalist sentiment will be tested.

There is a strong right wing candidate in Geert Wilders, whose “Trump like” campaigning style is attracting voters. His use of social media resonates with the young in a country where traditionalism has been the main driver of electoral decision-making in the past.

Some voters believe that the Dutch liberal values and openness are being taken advantage of by Brussels and Mr Wilders is campaigning on an anti-EU ticket criticizing monetary and immigration policies

The euro has also traded in a narrow range recently hemmed in by larger sell orders between 1.0780 and 1.0820 and buyers below 1.05 believing that the fall in the Euro from its 2016 high at 1.1620 is overdone.

China surprised markets overnight posting a rare trade deficit as imports (in CNY terms) rose by more than 44%. Imports were also higher but by a less significant 4.2%. This signals a strong start to the year for Asian business.

The AUD, the proxy for traders in the less liquid offshore CNY, is rallying to test resistance at 0.7600/20. The board of the RBA met on Monday and left interest rates unchanged at 1.25% believing that domestic demand will pick up to match the record trade surpluses recorded in the last two months.

Today sees the release of the U.K. budget delivered to the House of Commons by Philip Hammond the Chancellor of the Exchequer. This will be his first budget following on from George Osborne who had managed to steer the economy through its emergence from the financial crisis but best remembered for his unfettered borrowing which added £50bn to the UK’s annual interest bill.

A slew of economic data has just been released by individual Eurozone members. German industrial production rose 2.8% YoY, a little stronger than expected. That will drive further the inflation concerns of the Bundesbank and Finance Ministry. French trade, also just released, disappointed with the deficit more than doubling to Eur7.9bn.

The eyes of the market are clearly on the UK economy which is likely to have grown by around 0.5% in the first quarter while the Eurozone gently bumps along the bottom. There is no doubt that traders are right to be concerned about growth potential in the face of several headwinds but longer term (post-Brexit) the Eurozone will continue to suffer until Sr. Draghi manages to solve the conundrum of producing monetary policy to fit 19 different economies.

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