Sterling looks precarious
The US dollar gave ground as equities rallied initially on Wall Street yesterday. Still, a turn in that market quickly saw the dollar recoup losses, with the dollar index finishing 0.12% higher at 93.35.
Asian markets have a decided Friday look about them, with the rise in US equity futures pushing the greenback slightly lower against the G-10 and regional Asian currencies.
The euro rallied to 1.1920 but gave all those gains back to finish unchanged yesterday at 1.1810. The balance of risks now shifts to a test of support at 1.1750 and 1.1700, especially if the equity rally runs out of steam in New York today.
A daily close below 1.1700 sets up a possible correction lower that has the potential to run as far as 1.1400 to 1.1500. EUR/USD needs a daily close above 1.2020 resistance to confirm its longer-term appreciation is back on track.
Yesterday's big mover was the British pound. GBP/USD fell 1.50% to 1.2805 as the European Union threatened legal action over the UK’s intention to rewrite parts of the Brexit agreement with Europe unilaterally.
The UK’s actions now leave the post-Brexit talks that were already in trouble, in limbo. EUR/GBP rose 1.65% overnight, breaking out of its three-month range. Further gains could potentially target 0.9500 if the standoff continues.
With currency markets having to chase their tails and reprice long-forgotten Brexit risk, sterling now finds itself in dangerous territory. The fall overnight to 1.2805 broke 6-month trendline support at 1.2880 which now becomes resistance.
It leaves GBP/USD perilously closely to critical support formed by its 100 and 200-day moving averages (DMA) at 1.2690 and 1.2735, respectively. A loss of this crucial support zone will signal much deeper losses for sterling in the weeks ahead.
Sterling aside, currency markets are trading in a directionless manner, content to follow the nuances of equity markets for now.