Markets defy convention

February 13, 2015

The recent moves in FX markets have caught many people off guard. Perhaps not to the extent of the SNB floor removal a month ago, but the dollar strength of last year and the first part of January has come to a grinding halt. Despite the Bank of England at their quarterly Inflation Report saying that there is room to ease monetary policy further, GBPUSD rallied as growth forecasts for next year were readjusted higher. The market had become too bearish of sterling considering the growth prospects are much better than many other developed economies and recent sentiment data shows that the UK economy remains in good shape. There are now a growing number of calls expecting the BOE to hike rates before 2016. At the time of writing Cable sits above 1.5400 and with a bit of momentum behind it a test of previous support around the 1.5500 area should not be ruled out, which is the major near term resistance level for sterling vs the dollar.

The euro is the other currency defying many bears with EURUSD stubbornly recovering back above the 1.1400 level, assisted by better than expected German GDP data this morning. This is a well shorted trade and has been subject to a correction to the upside for some time, but risks surrounding Greece remain a limiter to any major move to the upside.

Another stand out move is Brent crude recovering back above $60 on the back of a weaker dollar and the prospect of spending cuts having a knock effect for production. Many are arguing that since crude prices have rallied over 20% from their lows (over 30% in fact), oil is technically back in a bull market.

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