The dollar clung to gains on Friday after a rout in stocks sent nervous investors to its safety, while sterling was poised for its worst week since March as British plans to break a divorce treaty with Europe rekindled the specter of a no-deal Brexit.
In a volatile session overnight the pound languished while other majors whipsawed in tandem with moves in the euro and the U.S stock market.
The common currency at first zoomed 1% to $1.1917 after European Central Bank President Christine Lagarde insisted the bank does not target the exchange rate.
But her subsequent remark that the bank indeed monitors it, and its effect on inflation – together with a tumble in U.S. stocks – brought investors rushing back to dollars and sank the euro back to $1.1825, where it sat in morning trade.
The risk-sensitive Australian dollar tracked the move and was up as far as $0.7325 before retreating to $0.7263 early in the Asian session. The New Zealand dollar fell to $0.6648 and was under gentle pressure on Friday.
Both could fall a little further during the day, Westpac analysts said, as the mood remains fragile and equities are likely to take the lead with little on the data tap in Asia.
Asia’s stock markets opened lower and U.S. futures pulled back to just above flat.
The safe-haven Japanese yen held steady at 106.12 per dollar, having inched higher overnight. Against a basket of currencies the dollar hung on to modest gains and looks set to finish a second consecutive week ahead.
The main laggard has been the pound. It tested an overnight low of $1.2773 early in the Asia session and has lost 3.6% on the dollar this week and about as much against the euro as Brexit turmoil resurfaced.
The European Union told Britain on Thursday it should urgently scrap a plan to break their divorce treaty. But Britain has refused to budge and pressed ahead with a draft law that could sink four years of Brexit talks.
EU diplomats and officials said the bloc could take legal action against Britain, though that would not resolve anything before the end-of-year deadline for Britain’s full exit, which is looking increasingly messy.
“The high risk of no trade deal between the UK and EU is a major drag for the pound against most major currencies,” said Commonwealth Bank of Australia currency analyst Kim Mundy
24-hour view: “Yesterday, we held the view that the rapid bounce in GBP ‘has room to extend further but any advance is viewed as part of a higher trading range of 1.2950/1.3055’. GBP subsequently rose to a high of 1.3035 before diving to an overnight low of 1.2773. While the outsized and sped up crash appears overdone, there is no sign of stabilization just yet. Further weakness is not ruled even though the next major support at 1.2680 is likely out of reach for now (minor support is at 1.2730). On the upside, resistance is at 1.2840 followed by 1.2890.”
Next 1-3 weeks: “We expected GBP to weaken since earlier this week. In our latest narrative from Wednesday (09 Sep, spot at 1.2965), we highlighted that ‘while the rapid drop appears to be overdone, strong downward momentum suggests GBP could weaken further towards the critical support at 1.2855’. We added, ‘a clear break of this level could potentially lead to further weakness towards 1.2680’. The 1.2855 level did not offer any ‘support’ as GBP crashed to an overnight low of 1.2773. In other words, the outlook for GBP remains weak and the next level to focus on is at 1.2680. Looking forward, the next support is at 1.2610. On the upside, the ‘strong resistance’ level has moved lower to 1.3050 from 1.3120 previously. On a shorter-term note, 1.2950 is already quite a solid level.”
EUR/GBP jumped more than 1.6% on Thursday to 0.9270, the highest level since March 25.
The pair has rallied by 400 pips in the past seven trading days, primarily due to renewed Brexit concerns.
The sharp rally looks overdone, according to the 14-day relative strength index. The indicator has crossed into overbought territory above 70 for the first time since March.
However, there are no signs of uptrend exhaustion on the price chart. Besides, indicators can stay overbought for a long time in a strong trending market. As such, the bias remains bullish.
That said, a minor pullback to the former hurdle-turned-support at 0.9176 (June 29 high) may be seen before further gains. That’s because there are signs of bull fatigue on the hourly and 4-hour charts.
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