FX Technical Strategy Weekly

It takes a brave investor to bet against further downside in GBP/G10 crosses following the brutal sell-off and speedy decline through key technical levels over the last three trading sessions.

Market Outlook

It takes a brave investor to bet against further downside in GBP/G10 crosses following the brutal sell-off and speedy decline through key technical levels over the last three trading sessions. We remain medium-term USD bulls and GBP bears, but ask whether the lurch lower in EUR/USD is overdone. The threat of a sharp rebound in the US unemployment rate above 10% in February could result in the unwinding of post discount rate hike USD gains, with the EUR separately standing to benefit from a flawless Greek 10y bond auction and more concrete plans of EU debt guarantees. Overall, the failure of major equity indices to challenge recent highs, stagnant commodity prices and speculation of tighter monetary conditions in China still warrant a cautious approach towards pro-risk strategies. With bearish seasonals lurking in March for the JPY, we think the SEK is well positioned within the G10 to extend its stellar performance, supported by hawkish central bank rhetoric and a relative sound fiscal position vis-a-vis other G10 nations. Shrinking UK/G10 rate differentials and talk of a snap UK general election should keep GBP on the defensive, with the tempo of liquidation increasingly characterising fears of a precipitous GBP rout.

Recap

• In the G-10 space this week, the Japanese yen and Swedish krona outperformed versus the US dollar. USD/JPY fell through 90 to end the week at 88.87, the lowest close since 15th Dec, benefiting from the reduced appetite for risk. USD/SEK fell 1.57% as rate hike expectations were brought forward following hawkish central bank minutes and strong Swedish retail sales data.

• Sterling was the worst performer, going through key technical levels versus the euro and the US dollar following dovish comments from MPC members at the Treasury Select Committee hearing. Despite an upward revision to Q4 GDP to 0.3%, GBP/USD hit a nine-month low, briefly trading below 1.52 while EUR/GBP rose 1.6% on the week to 0.8953.

• The euro recovered some poise despite starting off poorly as the four largest banks in Greece were downgraded. Reports of another austerity package and a 10yr bond issue next week in Greece helped EUR/USD to bounce as 1.35 failed to hold. EUR/USD closed up 0.38% at 1.3618. In emerging markets, the Chilean peso outperformed, gaining 1.37% versus the US dollar while CNY 12m non-deliverable forwards were largely unchanged at 6.64.

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