Currencies

The pair extends this week’s gains and probes parity, as markets gear up for Thursday’s rate decision by the European Central Bank and US GDP and PCE Inflation updates

The real rate (top candlestick chart) has declined since Friday, 22 Oct. This yield has a causal relationship with the greenback, and FXCM's USDOLLAR basket has followed it downwards. The H4 correlation coefficient between the two is a strong 78%. I.e. and further pressure on the real yield will likely ripple to the dollar.

This development comes as Rishi Sunak takes over as the new UK PM. As a result, politically uncertainty has waned, which looks to be translating into lower volatility in the near term. However, the UK economy still faces headwinds, and cable requires watching as policymakers manage these.

This may be a case of buying the rumour, selling the fact. Market participants will look carefully at Sunak's fiscal policy. He needs to restore faith following the adverse reaction to Trusseconomics.

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If the BoJ abandons the defense or alters it to a higher level, the market repercussions will be severe as USDJPY and JPY pairs reprice. Of course, it is anybody's guess when this might be. However, given the costs to prop up the yen, and its ineffectiveness, market participants should be very wary of the inherent risks when trading USDJPY and JPY crosses.

The GBPUSD daily chart shows that a lower peak has charted. Therefore, if the currency pair drops below 1.0920 (green horizontal line), a lower trough will chart, and cable's technical downtrend will continue.

The intermarket implications suggest a risk-off environment as the higher yield pressures the present value of risk and capital rotates towards the greenback for safety.

UK Prime Minister Liz Truss announced her resignation today. A run on British gilts and volatility in GBPUSD has primarily defined her six weeks in office following a failed gamble at expansionary fiscal policy and trickle-down economics

There was stabilisation after the new Chancellor of the Exchequer, Jeremy Hunt, rolled back most of the tax cuts delivered in September's mini-budget. However, all is not well, with the UK government cutting the Energy Price Guarantee from two years to six months.

Last week's real rate price action is insightful and shows a Doji candlestick (red arrows). The real yield attempted to move higher and lower but closed flat for the week. This activity implies uncertainty and indecision. Moreover, this comes when the real rate is overbought (green rectangle).