Pound Rebounds off “Flash Crash” Low, UK Blocks No-Deal Brexit

Summary: The British Pound stole the show, plunging to October 2016 flash crash lows at 1.1959, (1985 lows in regular trade) before rebounding to close little changed at 1.2085. UK lawmakers put forward and won a motion to block a no-deal Brexit and extend the deadline to January 31, 2020. Meantime, a contraction in US factory activity for the first time in 3.1/2 years pulled US yields and the Dollar lower. The Dollar Index (USD/DXY) dipped to 98.95 after hitting May 2017 highs at 99.37 overnight. The Australian Dollar jumped 0.75% to 0.6765 (0.6715), best performing currency, after the RBA held rates steady. A bounce in Copper prices led by a rise in Gold and Silver also supported the antipodean currency. The Euro stabilised at the expense of the broadly-based weaker Greenback after plummeting to a 28-month low, finishing 0.1% higher at 1.0975. USD/JPY slipped 0.26% to 105.95 weighed by lower US yields. EM currencies rallied versus the Dollar.  FX markets were choppy, a trader’s delight.

forexfactory US Manufacturing ISM - 04 SEPT 2019
forexfactory US Manufacturing ISM – 04 SEPT 2019

Wall Street stocks fell following the dismal US ISM report. The DOW dropped 1.08 % to 26,118. while the S&P 500 lost 0.7% to 2906.
The US 10-year bond yield fell 4 basis points to 1.46%. Two-year US rates dipped 5 bp to 1.45%.
US ISM Manufacturing PMI dropped to 49.1 versus 51.2 in July, the first sub-50 reading since August 2016. It is also the weakest figure since January 2016, stoking fears that the global slowdown has reached the US. The RBA kept its Cash rate unchanged at 1.0%.

  • GBP/USD – The British currency plunged to 1.09261, regular trading lows not seen since 1985. We exclude the “flash crash” October 2016 low. According to Reuters, “flash crashes are events in which a currency undergoes a sudden, dramatic and often quickly reversed price swing”. That “flash crash low was so brief and quickly reversed” many old time FX traders (this writer included) prefer to exclude an event altogether, always clarifying it as a “flash crash.” In regular trade, the last time Sterling hit 1.1959 was in 1985. GBP/USD closed at 1.2085, 0.11% up from yesterday’s 1.2070.
  • AUD/USD – The Aussie slumped to 0.66876 weighed by an overall stronger US Dollar and bearish sentiment ahead of the RBA rate announcement. The Australian central bank kept its overnight cash rate unchanged at 1.0%, keeping a balanced outlook. The Battler jumped to finish at 0.6765, up 0.74% as best performing currency.
  • EUR/USD – The Euro fell to 1.09261, overnight and May 2017 lows before rallying back to finish mildly higher at 1.0975. Increased speculation that the ECB will cut its benchmark rate by 20 basis points when it meets next week has weighed on the shared currency.

On the Lookout: The surprise slump in US factory prices to the weakest reading in over 3 years, now in contraction territory has turned the tables around for the Dollar. According to ING Bank analysts, “the US ISM Manufacturing Index has historically been one of the best lead economic indicators and the fact that all the main components are now in contraction is a major cause for concern.” The risk of a recession in the US is rising which will force further rate cuts from the Fed. And more pressure from President Trump. US Payrolls report on Friday will be crucial.
Todays data see Australia’s August Retail Sales and Chinese Caixin Services PMI for Asia. Euro area and Eurozone Services PMI’s start off the European reports. The Eurozone Retail Sales for August comes next. UK Services PMI data as well as UK Inflation Hearings follow. The Bank of Canada Rate Decision and statement are the day’s main event. While the BOC is not expected to cut it’s 1.75% Overnight rate, there are traders who expect a cut. Hence USD/CAD did not budge despite the weaker USD. US FOMC members Williams and Evans speak at separate events.

Trading Perspective: Without yield support, the Dollar will struggle. The 10-year bond yield dropped to 1.46%, while those of its global peers (apart from Canada) were little-changed. The Dollar is due for a downside correction and this may just be the catalyst. Market positioning is still long USD bets, which will add more downside pressure on the Greenback.

Refinitive Reuters US ISM vs USD DXY Chart - 04 SEPT 2019
Refinitive Reuters US ISM vs USD DXY Chart – 04 SEPT 2019
  1. GBP/USD – While the British currency had a good bounce off it’s lows, its still not out of the woods yet. Sterling jumped to 1.21055 before settling at 1.2085 from its low at 1.1959. Prime Minister Boris Johnson has threatened to put forward another motion calling for snap elections. Immediate resistance on the day can be found at 1.2110 followed by 1.2150. Immediate support lies at 1.2050 and 1.2020. Look for consolidation today with a likely range of 1.2030-1.2130. Look to trade the range.
  2. EUR/USD – The Euro closed at 1.0975 after dipping to May 2017 lows at 1.09261. Overnight the ECB governing council member and Bank of France Governor Villeroy de Galhau expressed scepticism over any fresh bond buying. This is mildly supportive of the Euro. EUR/USD has immediate resistance at 1.0980 followed by 1.1010. Immediate support can be found at 1.0960 and 1.0930. German 10-Year Bund yields were unchanged at -0.71%. Look to buy Euro dips with a likely 1.0960-1.1020 range today.
  3. AUD/USD – The Aussie had a good bounce against the US Dollar and its other peers. Tremendous bearish sentiment had weighed on the Aussie Battler and we saw a slump pre-RBA rate decision to 0.66876 overnight lows. Governor Philp Lowe maintained his wait and see policy despite heavy pressure from analysts and economists to cut interest rates. This writer believes that the RBA is conscious that the AUD TWI is near 2008 lows and will not want to currency to dip further on a trade weighted basis. The Aussie will get its next legs from an overall weaker US Dollar. Immediate resistance lies at 0.6780 followed by 0.6810. Immediate support can be found at 0.6740 followed by 0.6705. Look to buy dips with a likely 0.6750-0.6800 range today.

Tin helmets on, prepare for further roller coaster rides. Happy trading all.