The overall opportunity set for the broad dollar remains low, having reached a crossroads due to a lack of momentum over the past few months. The absence of key data caused by the government shutdown comes at a challenging time for a market in need of fresh catalysts. Meanwhile, attention may shift back to fiscal matters following the surprising results of the LDP election in Japan over the weekend. Emerging markets (EM) continue to attract inflows, but franchise volumes were extremely light at the end of last week, which is hardly inspiring in this generally rangebound market.
Tactically, the bias remains dollar bearish, although the lack of data does not inspire maximum conviction. There are still some euro longs in G10 and rand longs in EM as marginal favorites. A position was taken in USD/JPY cash midweek towards short-dated strikes, but the surprise Takaichi victory resulted in an options bill over the weekend. The previous trifecta of Koizumi leading to BOJ activism and weak payrolls now seems uncertain in the short term. For now, the yen view is being abandoned, but given the current noise, a more conservative approach is warranted. The risk of a BOJ hike this month suggests that chasing the yen lower without further negative commentary may not be advisable.
If the focus returns to fiscal disparities, this could support a bearish view on EUR/SEK, especially as domestic data continues to show strength. Although there was no information from the latest OBR report at the end of last week, a short position in GBP/SEK seems sensible. Client interactions last week revealed a 50/50 split on the euro, which is not surprising given the loss of momentum. Just as this piece is being finalized, news has emerged that Lecornu has resigned, prompting a watch on OAT price action. With the movement in JGBs overnight, fiscal profligacy is likely to remain a focal point. Remaining euros were sold on the headline, reflecting the market's volatility. Key levels to observe for the euro are the 50-day moving average at 1.1680 and the 100-day at 1.1620. While discretionary positions have been reduced in recent weeks, systematic traders may still be vulnerable.
Regarding GBP, there are not many updates from either side of the Atlantic. The US government shutdown continues, and the UK government has yet to disclose the extent of the OBR productivity revisions. The initial plan was to play EUR/GBP from the long side to augment averages, but the shift in focus due to the French news has led to a move to the sidelines. There is little on the UK calendar, with the REC survey due at the end of the week and some BoE speakers scheduled, starting with Bailey this evening. Next support levels for the cross are at 0.8690/00 and 0.8665, while resistance remains at 0.8745/50. For GBP/USD, support is expected at 1.3390/00 and 1.3530/35.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!