FX Technical Strategy – Weekly by Lloyds TSB

The key driver of FX continues to be asset market sentiment and the on going prospects for equity markets. Understandably, participants are anxious to know whether the ultimate low in equities has been hit, implying positive prospects for pro-cyclical currencies.

The key driver of FX continues to be asset market sentiment and the on going prospects for equity markets. Understandably, participants are anxious to know whether the ultimate low in equities has been hit, implying positive prospects for pro-cyclical currencies.

The answer comes down to timing once again. The primary trend for now is assumed to be downwards, but this does not preclude periods of equity gains. These gains, even in servere bear markets, can be substantial and can give the impression the market has changed trend. The recent rallies in equities is, by most key participants, viewed as a bear market correction, but this does not also mean a considerable medium term recovery could develop before the market succumbs to broader downward forces. Hence the current sharp retracement could still be part of this medium term rally which should favour buying dips in sterling and commodity currencies.

It is fair to say that ‘normal market’ correlations are still in holiday mode and the broader technical set-ups for FX vol. continue to trend lower. So whilst this strategy may have to be reversed at pace, the upside risk/reward profile favours a positive medium term outlook.

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