Great start to the week for risk markets. The culprit seems to be the Shanghai Composite which has surged on the back of strong corporate earnings. As with last week, currencies are largely unaffected by all the good cheer. It’s fascinating but the implications could be sobering as well… one would normally expect risky currencies to correlate highly with this sort of positive equity market environment, either via the flow mechanism or direct investment, but it’s not really working right now. Of course it could be just as simple as macro funds having done terribly this year, so their appetite for risk is low. Who knows!?
After the capitulation of cable, GBP/USD, over the last week, I’m wondering if we get a breather here. The personality of the move reminds me of what one would expect of a wave ‘C’ impulsive move lower in Elliott wave technical speak, as the currency pair has traced an A-B-C corrective pattern throughout July. The ‘B’ wave would have been the move to a new high, which was off fading momentum. Should that conjecture be accurate, we should look out for signs of recovery in the near future, with a re-test of the highs to follow.
While EUR/USD looks due some period of consolidation soon, the momentum has been much stronger to the downside than with cable, I would therefore expect EUR/GBP to come under pressure again in the coming sessions. Indeed this seems by far the higher conviction cross of the three, and I continue to look for this move to extend towards the 0.7780 area.
There really is very little data of note today. Retail sales and business confidence in Italy is probably the most noteworthy. Looking further out into the week, in the US, we have the Federal Open Market Committee (FOMC) rate announcement on Wednesday, as well as sentiment data for the Eurozone. Anticipation of FOMC is likely to mean that not much happens before the middle of the week. Frankly, if a surge in Asian equity markets isn’t enough to get currencies to join the party, it’s hard to see anything but sluggish price action leading up until Wednesday!