FX Comment into BoE, and NFP

FX Comment

With month-end now behind us, where distortions caused difficulties in many asset classes, focus for the end of the week and start of a new month is the latest Labour report from the US.

October has truly been a testing month for most so many market investors will be looking to re-engage on the back of the data.

THE USD has remained bid throughout Oct and especially so over the past few sessions. Sterling as an example has lost 4% in value as Brexit worries grew.

Today brings the BoE monetary policy meeting.

EURUSD has declined to just above 1.1300 in an orderly decline as EU data printed worse than expected, GDP especially, and weaker PMI numbers. With Draghi’s testimony still in mind from last week, traders were happy to sell rallies for the common currency.

The BoE is expected to keep rates unchanged at its upcoming monetary policy. However, market participants are likely to closely watch the BoE's latest inflation report in the light of recent up-tick in wage growth. BoE Governor Carney's thoughts on Brexit, volatility in sterling and the growth outlook will be of interest.

Friday brings the US October Non-Farm payrolls report. The market consensus at the time of writing is for a 190k headline reading. This follows a below expectations 134k number in September, largely on the back of factors such as abnormal weather conditions. The main focus for the market will likely be on the earnings data once again, where the economists’ consensus is for a +0.2% mom average hourly earnings reading down from the +0.3% mom reading last month. Base effects should see the annual rate increase 0.3 percentage points to +3.1% yoy - which would be the highest since 2009. Lastly, the unemployment rate is expected to remain steady at 3.7%. ADP was a slight miss on Wednesday, but is unlikely to cause a stir or incur changes to NFP expectations.

The last piece I wrote came with a negative piece on the pound, yet tagged with a buy trade recommendation. In short I suggested buying GBPUSD at 1.2800/1.2810 with a stop at 1.2775/80. This was triggered earlier in the week.

I also suggested selling EURGBP at 0.8925, with stops above 0.8955. This trade is still live and has met first take profit levels at 0.8843 and 0.8823.

UK Brexit Minister Dominic Raab has been sounding positive on Brexit on Wednesday, going so far as to say a deal will be struck by the Nov14th meeting. This has caused a positive stir in the sterling markets, pushing cable back through its 1.2780 pivot and EURGBP lower to the 0.8855/60 support area. The move was further extended by a Times piece overnight outlining details of continued access agreements to the European markets for UK companies.

Recently positive headlines for Brexit has been followed by a spike in Sterling only to retrace the move in the consequent sessions, so care is warranted here, with a suggestions to take profits if possible. For those unable to enter the market, patience is required.

If one looks at the GBP options markets, we can see that market investors are most negative on pound since 2016 as Brexit risks mount, looking at 1m risk reversals for cable.

Up to Raab’s comments this week, Brexit headlines have been poor, if appearing at all. No news is bad news. Even if Britain can agree a deal, PM Theresa May will need to get parliamentary approval, as well as convincing opposing factions in her own party.

Trades I continue to like.

New month new Risk, following Oct I see a turnaround for Nov so look to buy risk

Buying dips in AUD to 0.7085, risking 0.7050 close

EURUSD dips to 1.1340/45 risking 1.1300 for a rebound to 1.1420/25

Buying sterling dips to 1.2810/1.2780 ,EURGBP 0.8888/0.8900

And for something different, CHFJPY, buying through 112.80