FX Feeling Chipper with Euro and Pound Bid

Market Drivers February 25, 2019
Trump extends China tariffs deadline
EU mulls Brexit extension to 2021
Nikkei 0.48% Dax 0.35%
Oil $57/bbl
Gold $1328/oz.

Europe and Asia:
NZD Retail Sales 1.7% vs. 0.3%

North America:
USD Wholesale Inventories 10:00

The week in FX started with a mild risk on trade as political news over the weekend bolstered investor sentiment.

President Trump announced a delay in the increase in tariffs against Chinese goods, noting that trade negotiations have been progressing well. That helped fuel a mild rally in comm dollars with Aussie taking out the .7150 level while kiwi climbed steadily towards the .6900 figure. At the open the better than expected print in New Zealand Retail Sales which climbed 1.7% vs. 0.3% eyed also helped boost the pair.

Trump is clearly eager to make a deal with Chinese and at this point, much of the good news is factored in. In fact, any breakdown in talks would now be viewed as a major negative shock to the markets and could trigger another violent wave of risk aversion.

However, the true support to the market has come from a 180-degree turn in monetary policy and to that end Chairman Powell’s testimony to Congress will probably be the key event for FX this week. The market will be keen to confirm that the Fed does not intend to resume tightening anytime soon. Having stabilized the markets, the Fed is unlikely to rock the boat. In its past efforts to engineer a soft landing, the Fed has always waited at least 9 months to ensure that economic conditions were steady before resuming any tightening protocol. However, if Powell hints that policy may revert to normalization with a quarter or two the risk on flows will quickly reverse.

In Europe, the positive tones were also aided by rumors that EU may be willing to extend the Brexit negotiations by two years allowing the UK to remain in the union through 2021. That would no doubt provide much-needed relief to businesses in the region and cable reacted positively to the news but the initial run to 1.3100 was quickly repelled by the seller. Still, both euro and pound remain supported at the start of the week and longs are hoping that US corps could extend the rally by taking euro towards 1.1400 and cable to 1.3100 later in the day.