Breakouts Across The G10 FX Board

Cable is, perhaps, the best place to start, though some home bias may be creeping in to steer that decision. The pound broke north of $1.30 on Wednesday, for the first time since April 2022 though, notably, was unable to maintain the break on a closing basis.

Furthermore, it’s important to contextualise the move, with the break north of the big figure being driven not by a sudden change in fortunes for the UK economy – whose outlook continues to look rather bleak – but instead being driven by a marginal dovish repricing of the US rates curve, with the cooler than expected CPI and core CPI data leading markets to price a lower terminal fed funds rate, as well as an additional 10bp of easing in H1 24.

Consequently, we have seen similar breakouts across the G10 FX board.

The EUR, for instance, has charged higher over the last 24 hours, slicing through the 1.11 handle like a hot knife through butter, to print fresh highs since March 2022. The common currency now sits in a very interesting spot, testing a confluence of resistance levels dating back to the second quarter of last year, the uppermost of which, at 1.1185, is likely to prove rather stiff indeed. Nevertheless, holding above 1.11 on a closing basis on Wednesday has flipped near-term momentum in the bulls’ favour.

A similar move has been seen in the JPY, with USDJPY having rapidly backed away from the 145 handle – a level at which many had been expecting the BoJ/MoF to intervene – to now trade at the lowest levels in a couple of months.

The speed of the move has led some to suggest that the not-so-silent hand of the Japanese authorities may be at play. However, it would appear more likely that the initial bout of selling was then exacerbated by the unwind of numerous carry trades, where traders had been short JPY in an attempt to capitalise on the rate differential between the US & Japan were then forced to repurchase the JPY in order to close out their positions. History tells us that carry unwinds can be rapid, come out of the blue, and be violent in nature, as this move has again proved.

The question for market participants now is where the USD is likely to head next – will these breakouts see momentum flip in favour of dollar bears, or are they moves that are ripe to be faded?

When considering this question, we must view the moves in the context of the macroeconomic backdrop. As noted, the catalyst for the move was US CPI finally printing with a 3% handle, rising at the slowest pace in a couple of years, and subsequent expectations that the Fed will adopt a more dovish stance.

Once more, however, it would appear that markets are getting a little ahead of themselves on this front, with the ‘higher for longer’ mantra on rates still holding water, particularly with core CPI, and core PCE, both set to run north of the FOMC’s 2% aim for at least the next 18 months. Furthermore, with economic growth – particularly in the services sector – continuing to hold up well, and the labour market remaining tight with a resilient pace of payrolls growth, those banking on a Fed cut in the near-term may, yet again, find they have placed their bets prematurely.

Taking this into account, and considering the typically thin trading conditions seen during this time of the year, which can exacerbate moves once they gather momentum, it appears that the moves being seen are not supported by the economic fundamentals. As such, a rather rapid reversal could soon be on the cards.