Home / Forex Analysis / GBP Jumps 2%, US Yields Hits 5 Month Lows

GBP Jumps 2%, US Yields Hits 5 Month Lows

GBP Jumps 2%, US Yields Hits 5 Month Lows

Daily FX Market Roundup 04.18.17

Trading kicked off with a bang after the Easter holidays thanks to U.K. Prime Minister May who shocked the markets by calling a snap election in June.

This announcement was completely unexpected even by those within her own government and goes against a vow to forgo calling another election before 2020. The surprise is evident in the price action of pound, which rose nearly 400 pips between the European and NY trading session. While an argument can be made that the election introduces new uncertainty, a flash poll by ICM finds May’s party with a 21-point lead. The goal of the election is to shore up political support for all of the decisions that will need to be made over the next few months. As May said in her speech, “The country is coming together, but Westminster is not.” Of course she would not have called the elections without a great deal of confidence that she will win and based on sterling’s reaction investors also believe that Conservatives will sweep the votes. If she succeeds like the market expects, the support of her people gives her strong negotiating power with the European Union. While the move in GBP/USD is overdone and the polls will most certainly narrow, it is important to remember that GBP can be a very trending currency and after today’s move, there is no resistance until 1.30.

The weakness of the U.S. dollar also helped to drive the British pound higher.

U.S. yields fell sharply today on the back of disappointing U.S. data. Housing starts dropped -6.8% in the month of March, more than double expectations. Building permits increased and industrial production met expectations but these reports were not strong enough for investors to forget about all of the recent deterioration in spending, inflation and manufacturing activity. The Beige Book is scheduled for release on Wednesday and while the U.S. economy in general continues to recover, if Fed districts report a slowdown, the dollar could extend its losses quickly. USD/JPY has actually been fairly resilient considering that 10 year Treasury yields dropped over -7bp today to its lowest level since November. There’s clearly a lot of bids underneath 108.00 but unless U.S. data takes a turn for the better, it should only be a matter of time before this level breaks, giving way to a stronger move down to 106.

Euro rose to its strongest level versus the U.S. dollar in 3 weeks.

The move had nothing to do with the outlook for the Eurozone and was instead driven entirely by the weakness of the U.S. dollar and a sympathy rally with the pound. Regardless of catalyst, EUR/USD broke above 1.07. We are weary of this rally as the U.K. election makes the French presidential election even more important and we are days away from the first round of voting in France with the polls showing Macron and Le Pen are neck to neck. Investors will be watching the polls closely over the next 3 days as they digest incoming data. The Eurozone’s inflation and trade reports are scheduled for release on Wednesday followed by the Eurozone PMI reports on Friday. Economic conditions have been improving in the region but inflation remains low – so tomorrow’s reports may only provide limited support to the euro.

The Canadian and Australian dollars traded sharply lower today while the New Zealand dollar marched higher.

The loonie collapsed on the back of a slowdown in existing home sales growth, lower oil prices and most importantly a sharp -7bp decline in 10 year Canadian bond yields. Ten year rates dropped to their lowest level since November. The Australian dollar was hit by dovish RBA minutes. At the last central bank meeting, policymakers expressed specific concerns about the housing and labor. While some could argue that these minutes are no longer valid after the latest jobs report, the RBA also said while the “latest jobs report was better, they will remain cautious given volatility in the series.” The New Zealand dollar on the other hand extended its gains on the back of rising dairy prices. The value of the country’s most important commodity increased for the third auction in a row, this time by 3.1%, which was the largest increase this year. The country’s PMI services report is scheduled for release this evening and we are looking for a firmer report given the sharp rise in the business PMI index.

Kathy Lien

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Having graduated New York University's Stern School of Business at the age of 18, Kathy has more than 13 years of experience in the financial markets with a specific focus on currencies. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures. In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market. In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications. She also appears regularly on CNBC – US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the best selling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game – all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.