Bumpy ride in forex markets

FX and Gold market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi, 

The European Central Bank (ECB) walked back the EUR-negative policy divergence last week which offered support for the EURO into week’s end. 

While there’s good cause to be wary of EURUSUD over the short term, a still-fragile political situation notwithstanding, the single currency’s moderately pro-cyclical beta and its positive correlation with equity and commodity prices, should limit downside.

The Euro outperformed on Friday as the ‘risk-off’ move negatively affected all of those short EUR crosses, more than the EURO itself. While the single currency’s performance is a bit surprising n the face of BTPs hitting new wides against Bunds as Italian PM Conte contemplates going to an early election.

But key on Friday was the street scrubbing divergence risk off the near-term chalkboards.

Sterling traders paid the price on Friday for Thursday’s exuberance when bullish Pound bets caught smacked by visions of another hit to the service sector, UK PM Boris Johnson signalled the lockdown could last into summer.

Oddly, the PM delivered these comments despite successful vaccinations and a slowing-down in cases’ growth rate. So, on a fact or fiction trade, traders will always run with the facts hence Cable came back bid and was unwavering at 1.3635 support.

While the path is likely to remain bumpy, given the all the vaccine optimism, in no small degree, investors will be pressure to hold the course on cyclical assets and cyclical EM currencies in particular.

Gold investors to focus on stimulus progress

Gold investors will continue to monitor fiscal stimulus progress. The dialogue appears to be shifting to a lower top-end number, which is not suitable for gold from the” bigger is better” perspective.

And last week’s market reaction to favourable US economic data with bond yields lower suggests the FOMC may not be highly impactful unless the board surprises the markets by hinting at a taper withdraw date.

The bond traders will then start to throw darts at that target and drive yield higher negatively for gold. Regardless, at some point in Q1 or early Q2, I expect the market to price in more term premium negatively for gold pointing to an ultimate top-end capper around $1950-60.

It’s not entirely clear what triggered the large sell-off in metals on Friday as it was a pretty big outsized move relative to the reaction in rates markets. Perhaps thoughts of the expected physical Lunar New Year buying bonanza wilting and with much of the US stimulus event be it 1.5 or 1.9 trillion priced into the golden cake, leaving investors headline and backchannel prone to the discussion around central banks’ shifting focus to the upsides.

It will undoubtedly be a long process to monetary policy normalisation. Still, central banks have already started to change direction to upside scenarios that broader vaccinations this year might bring to the horror of virtually every gold investor.

In this regard, the vaccine will be a Central Bank policy game-changer and likely one for gold prices also which I firmly believe have seen their policy inspired heyday and it will be up to inflation from here on out to do the bulk of the heavy lifting.

The decline in precious metals did not appear so severe when looked at against the broader move lower in a range of asset classes. From equities to commodities, including petroleum to agricultural goods, all fell back for much of the day.

Gold and the other precious metals pared losses at the end of the day as did other commodities, including oil.

This coming week we will see what progress is made on the US$1.9 trillion fiscal stimulus package. Presumably the smoother the packet passes, the more favourable for gold.

On the central bank front, the highlight is the FOMC decision. The FOMC meeting should be gold supportive, but not new news.

Robust GDP data could weigh on gold if yields react higher, but aid silver and the PGMs. On balance, gold may trade in an $1825-1875 ahead of the US Fed meeting with only a very modest up.