Positioning for volatility

November 4, 2015

This week is turning out to be something of a waiting game for FX markets, given the swathe of UK events scheduled for Thursday and Friday’s payrolls data in the US. Ahead of that, we’ve seen the latest PMI data from China come in slightly better than expected overnight, with this helping a better tone to Asian stocks and also underpinning the better tone to the Aussie gained in the wake of the interest rate decision yesterday. AUDUSD is challenging the 0.7220 level, but struggling to hold above it for the time being. Sterling will be focused on the services PMI data today, which has been falling for the prior four months and given the extent of the turn-around seen in the manufacturing data earlier in the week, the market expects 54.5 (from 53.3).

The point in the UK is the long time until which a hike is fully priced in, which is currently fully priced for October of next year. It’s this which is most vulnerable tomorrow should the Inflation Report come out with a more hawkish tint, which would be supportive for sterling. EURGBP has been pretty relentless recently in its move lower, which could be enhanced in this scenario, pushing the cross back towards the 0.70 level. We also see trade balance and ISM data in the US today, with the latter seen steady on the final services measure. Overall, the market is still pricing nearly 50:50 chance of a Fed hike mid-December, so we’re going to see the dollar become increasingly sensitive to data releases as this meeting draws ever nearer.

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