Elevated Volatility Keeps European Currencies Under Pressure as Investors Seek Sanctuary in the Dollar

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Sweeping one-way moves across many asset classes last week saw the most liquid FX market begin to experience liquidity problems and potentially trigger a margin call cascade. Early Monday morning, the pound sterling and the euro struggled to find buyers for several minutes, while the dollar index set a new high (114.50): Dollar index, EURUSD, GBPUSD, 1M time frameThe spike in the GPBUSD reached the level of 1.03. Subsequently, the EURUSD and GBPUSD partially pared the fall, however bullish sentiment in the Pound remains extremely weak and the risk of speculative pressure suggests that the pair is likely to continue exploring new lows in the near term. FX option market prices in 28% implied one-week volatility in the GBPUSD, which is also a strong sign that the sell-off is far from over, especially without verbal or policy intervention from the Bank of England. European markets are trading in the green, however winnings are capped at half a percent. The US futures are trading near the open, indicating that the market has largely taken into account recessionary risks from the hawkish position of the Fed, outlined last week at the FOMC meeting, as well as soon consequences of a new round of geopolitical tensions. Therefore, apart from new shocks, especially from the geopolitical front, a consolidation in the risky asset market seems to be a more likely scenario this week than an extension of the decline. However, bearish pressure continues in sovereign debt markets due to inflation and political tension concerns. Yields are rising across all maturities, but if in the US this is due to fears of excessive Fed tightening, then in the EU and the UK, yields are rising amid expectations of fiscal stimulus (increasing government bond supply) and fears. of sticky energy-driven inflation. The depreciation of European currencies, together with the fact that they depend on energy supplies, creates a vicious circle in which the swelling trade deficit puts pressure on the exchange rate, which creates even greater fears of an imbalance in foreign trade in favor of imports. . Falling oil somewhat facilitates the development of this trend. Basic sentiment also prevails in Asian FX. The onshore yuan made another jump up on Monday, the USDCNY tested 7.15. The PBOC intervened by increasing the reserve ratio for the foreign exchanges to 20%, thus limiting further pressure on the exchange rate. The weak yuan also explains the negative performance of the currencies of emerging markets, as well as the currencies of China’s trading partners in G10, where its share in trade is large, such as the AUD and NZD. Both currencies weakened against the dollar on Monday by about half a percent. The economic calendar this week is pretty dull, with US durable goods orders due on Tuesday, GfK German Consumer Confidence on Wednesday, Germany’s September inflation report (preliminary estimate) and the final estimate of US GDP growth for 2Q on Thursday. On Friday, the report on inflation in the Eurozone is due, core inflation is expected to show an acceleration of 4.3 to 4.7%, possibly provoking more policy response from the ECB.

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