As previously commented, the USD continues to look strong vs the majors (excl GBP for now) as economic numbers and fundamentals all point to an early recovery in the US economy. We have seen over the past few months how the FED has consistently reduced their QE purchases in lieu of this recovery gathering steam. Talk is starting to heat up about WHEN not IF they are likely to raise rates. Though we need to reiterate that pulling the trigger too early could hamper the recovery and set the US economy back, thus delaying the inevitable. It is vitally important that before such a move the economy and job market in general finds itself not only maintaining a positive momentum but also growing. Remember the worlds economies are reliant on the US recovery so supporting it is imperative.
For this reason, and as I have previously stated, EUR/USD will test 1.3000 (in fact some people have started to call for PARITY – EUR/USD 1.0000). While this is not impossible by any stretch of the imagination, let’s not get ahead of ourselves. Remember baby steps!! So let’s get the USD through 1.3000 to start with. There is still a great deal of work to get to 1.2000 let alone break it. As I said above, the US economy must grow by itself through higher demand (amongst others). The last thing we need is for the USD to rally to high too fast making US exports less competitive and thus slowing manufacturing output. As any economist will tell you, a sure way to help drive any economy is to allow ones currency to slide making exports attractive (as earnings are in foreign currency) and imports less attractive. So what I am saying is in my opinion below 1.2000 (EUR/USD) American companies will feel the pinch as they receive fewer USD on their sales. Trust me when I say this, the FED are well aware of this and will take the necessary actions. As I have said over and over again, currency markets are in some way manipulated by Central Banks to keep control.
GBP/USD rallied all yesterday after strong PMI numbers. Currently trading at 1.6865, it is bucking the trend vs the USD. The UK economy continues to show amazing recovery under the present Govt. No doubt the old saying cut your cloth according to your means runs deep in Conservative circles. You cannot simply print money to get out of a pickle. The economy must be run like a business. This is what is happening and the results are there for all to see. Business is back!!! It is imperative then that the Conservatives hold onto power next year so that they can continue on this path. Any alteration no matter how small could have severe repercussions. I am cautiously optimistic that come next May business will realise this importance and keep the Conservatives in power thus maintaining the economic growth.
As for the FX Options market, volatility remains subdued with 1m GBP/USD 4.50/4.70, 1m EUR/USD 4.60/4.70, 1m EUR/GBP 4.7/4.9. Again the market finds itself drawn to offer “Vega” rather than be forced into buying “Vega” and paying “Theta” (time decay-premium). While I must admit the price action over the past few days has been reassuring, if one looks at historical volatility that paints another picture. It is for this reason and the desire to manage ones negative Gamma that is forcing volatility to remain offered. I for one do not see any major change UNTIL we get closer to the EUR/USD 1.3000-1.3100 levels. Only then will market makers start to cover in anticipation of the next big move. Keep stops tight, and stay on the trend. EUR/USD LOWER – GBP/USD higher – EUR/GBP lower….all points to GBP being the ultimate winner…for now.
Have a good day ahead