Week Ahead: FX Traders, Get Ready For Another Volatile Week - Credit Agricole

GBP staged a comeback in recent weeks, buoyed by better-than-expected UK PMI and housing data and the unwinding of extreme market shorts. Data releases next week could confirm that the initial Brexit shock was smaller than feared and support the currency. That said, we doubt that the bounce will grow into an uptrend, given that the long-term risks for the UK economy remain on the downside. We expect the BoE to stick to its cautious outlook next week, despite the latest improvement in the data.

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The negatives could outweigh the positives and GBP should struggle to perform against G10 and especially other European currencies such as EUR and SEK. We further note that the extensive GBP-shorts in the FX spot and option markets have been cut of late, as suggested by our analysis of market and in-house flow data. This could leave GBP vulnerable to potential renewed data disappointments in the near term.

EUR should remain relatively supported in the aftermath of the September ECB meeting, which highlighted that the Governing Council may find it hard to add further stimulus in response to a persistently challenging economic outlook. SEK could regain more ground as well, supported by evidence of accelerating Swedish inflation.

The SNB should leave its policy unchanged keeping CHF at the mercy of external factors.

The USD-bulls may have to endure another volatile week, with August retail sales and industrial production likely to attract considerable attention. That said, we note that various Fed officials have signalled willingness to proceed with rate normalisation despite disappointing data of late. With the market rate hike expectations relative low at present, we believe that any positive economic surprises should have a disproportionately greater impact on USD.

We believe that the Fed is closer to hiking rates than rates markets seem to believe, while both the BoJ and the ECB are struggling to add fresh stimulus. In addition, investors could be reminded of the persistent global growth scares by potential disappointments from next week’s activity data out of China. This could trigger renewed tightening in the global financial condition and erode investors’ appetite for risk