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Will political instability undermine sterling?

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Written by:
Myrsini Giannouli

20 January 2022
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Important Calendar Events

  • EUR: German Monthly PPI, Annual EU CPI and Core CPI, ECB Monetary Policy Meeting Accounts
  • USD: Philly Fed Manufacturing Index, Existing Home Sales, Unemployment Claims, Crude Oil Inventories
  • GBP: RICS House Price Balance
  • JPY: Trade balance

USD

Wednesday was a slow day for the USD, with the dollar index ranging between 95.50 and 95.77 for most of the day. US yields fell across the US Treasury curve, weakening the dollar, although it is still supported by anticipation that the Fed will adopt a tighter monetary policy this year.

This week no major announcements are scheduled for the dollar and investors will probably focus on the upcoming FOMC January two-day meeting on January 25-26, which is expected to shed more light on the Fed’s monetary policy.

Important US calendar events on Thursday include the release of the Philly Fed Manufacturing Index, Existing Home Sales and Unemployment Claims. Unemployment claims are particularly important and their release might cause some volatility in the currency, as they provide an indication of the country’s economic state and may influence future monetary policy.  

TRADE USD PAIRS

EUR 

The European Central Bank released its monthly Current Account data on Wednesday, which were higher than expected, indicating a positive direction to the Eurozone’s economy.  In addition, Germany’s benchmark bond yield rose above zero for the first time since 2019, as investors anticipate that central banks may gradually tighten their monetary policy in order to combat inflation. 

EUR/USD rose to 1.134 on Wednesday morning, as the dollar weakened and positive economic data bolstered the Euro. For the remainder of the day, EUR/USD traded sideways around the 1.134 level. If the currency pair goes up again, it may find resistance at 1.148, while if it declines, support may be found at 1.131.

On Thursday, the German Monthly Producer Consumer Price Index and the EU annual Consumer Price Index and Core Consumer Price Index are scheduled to be released and may cause some volatility in the currency, as these are inflation indicators and may affect ECB monetary policy. European Central Bank Monetary Policy Meeting Accounts are also scheduled to be released and may provide insight into the ECB’s future interest rates.

EURUSD 1hr chart

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GBP 

Annual inflation rose to 5.4% in the UK according to Consumer Price Index data released on Wednesday, while the core annual inflation rate rose to 4.2%. According to the British Office for National Statistics, the 12-month inflation rate was the highest since September 2008. The sterling rose after the release of the inflation data, amidst growing expectations that the Bank of England would tighten its monetary policy to reduce inflation. High inflation rates and low wages in the UK increase the chance that the BOE will announce a rate hike at its February 2nd meeting. 

The current political climate in the UK is holding the sterling back though, as PM Boris Johnson risks getting a vote of no-confidence and faces tough questions in a heated parliament meeting on Wednesday evening. The British PM, whose approval ratings sunk to an all-time low on Wednesday, attempted to reverse the negative political climate by announcing an end to all Covid-19 restrictions in the UK.

The GBP/USD traded sideways on Wednesday, around the 1.362 level. If the GBP/USD climbs again, there may be resistance at the 1.375 level, while if the GBP/USD price falls, it may find support at 1.356.

The Royal Institution of Chartered Surveyors is scheduled to release House Price Balance data on Thursday and these are indicators of inflation, but are not expected to cause high volatility in the currency.  

GBPUSD 1hr chart

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JPY 

USD/JPY was slow on Wednesday, after experiencing high volatility on Tuesday. BOJ Governor Haruhiko Kuroda stated decisively on Tuesday that the Central Bank would not reconsider its ultra-accommodating monetary policy any time soon, and the Yen settled close to its previous levels. 

On Wednesday, the currency pair continued trading along its downtrend at the 114.3 level and the outlook for the pair is slightly bearish, although that may change if the dollar picks up in the following days. If the currency rate continues falling, it may find support at 113.48, and further down at 112.55. If the pair starts recovering, resistance may be found at 115.6, while the 116 level may present another resistance point. 

On Thursday, the ministry of Finance in Japan is scheduled to release monthly Trade Balance data, but these are not expected to create high volatility in the currency.

USDJPY 1hr chart

TRADE JPY PAIRS

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Written by:
Myrsini Giannouli

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