FX Technical Strategy Weekly by Lloyds TSB

The coming weeks look set for a range-bound market. A few weeks ago, I suggested that FX volatility was too high and could even trade in single digits by May when looking at one month Euro dollar vol

The coming weeks look set for a range-bound market. A few weeks ago, I suggested that FX volatility was too high and could even trade in single digits by May when looking at one month Euro dollar vol (below). This has favoured an oversold bounce in sterling and is likely to continue for now against selective currencies. Whilst the dollar may well weaken further in the medium term, the ‘grand sell off’ for the dollar remains a long term story (as proposed in the last release). This, in my view, is tied together with inflation and a collapse in bonds.

The reason for this ‘delay’ is simple. Equities are unlikely to have hit the ultimate low. A correction in a bear market can look exactly the same as long term base which is why there are many proponents expressing bullish views.

However, whilst this is a short term scenario, the technical set-ups in the major equity markets still imply further downside, which will keep the dollar in demand for a while yet. The stock rebound we have seen so far is encouraging and started with out performance of Chinese equities and reversing commodity prices that the broader market has only just picked up on. But it is fair to say that the occassions when risk appetite does return (as it has now) it will remain vastly reduced, so dollar weakness has to be viewed with caution.

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