Risk Off Remains Key Theme

18 May, 2017

Risk Off Remains Key Theme

Our prop desk has closed out long EUR/USD and short EUR/JPY positions for healthy profits in recent hours, although a short oil play from late yesterday is failing to deliver for now.

There’s a scattering of economic data on the agenda today and indeed we’ve seen some key releases from Asian markets in recent hours, but the overriding theme is uncertainty as to what happens next in the US. Equity markets are already selling off and there’s mounting anxiety over how tenable Trump’s position is now that Republicans are openly calling for his impeachment. As we’ve been saying for some time, a correction for stocks is overdue – it’s a question of when, not if.

Traders are continuing to take a risk off approach in the market with the US dollar index pushing lower as the market braces itself for whatever may happen next. With equities still overvalued – and US Q1 earnings have reinforced this belief – add this to the fact that Republican lawmakers are now calling for Donald Trump’s impeachment and we could be moving towards a perfect storm, with inflated US equity markets likely to be at the very core.

USD/JPY has fallen back to levels not seen since the end of April, although the move was driven by yesterday’s risk aversion rather than the far better than expected Q1 GDP reading we saw released a few hours ago. So long as we have this political overhang from the US, the Yen has the potential to remain very much in favour, even with the absence of further high profile economic releases out of Japan between now and the weekend break.

The Aussie dollar continues to find favour, although upside for AUD/USD is once again being driven more by that flight away from the greenback, with the far better than expected Australian employment reading adding very little to the equation. Again there’s little fresh data due from Australia this week, but the uptrend seems likely to continue given the uncertainty we have building in the US.

UK retail sales are due for release at 8.30am GMT and these could provide further evidence of the consumer slowdown in the UK. Inflation is once again running ahead of wage rises so disposable income is under pressure. Although cable is likely to be insulated from further downside pressures given that overhang from the US, EUR/GBP could see further upside if the idea of a Bank of England rate hike is pushed further back in light of this print.

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