GBP/USD: The pair was a key focus across FX markets

GBP/USD

The pair was a key focus across FX markets this week with the result of the widely anticipated Scottish referendum due for release. Despite a slew of other risk events this week including the UK inflation numbers, jobs report, retail sales and BoE minutes, the pair’s price action was largely centred around issues in Scotland. Weekend polls revealed that the ‘No’ camp held a marginal lead before polls later in the week revealed a larger margin of victory for the unionists, with GBP/USD managing to break back above the 1.6200 and 1.6300 handles in the process. This move to the upside was then extended when the result of the referendum officially revealed a victory for the ‘No’ camp with GBP/USD reaching highs of 1.6525. Thereafter on Friday the pair ebbed lower as participants booked profits with GBP also being out-muscled by the broadly stronger USD. Looking ahead, focus will be on further compression in implied volatility spreads as market participants refocus on BoE monetary policy.

EUR/USD

This week was a particularly mundane week in terms of Eurozone tier 1 data or economic commentary with the only notable event from the area being that of the ECB TLTRO. The allotment in the ECB operation fell short of expectations which theoretically would result in a smaller liquidity increase to the Eurozone than previously forecast. Ceteris paribus this would result in a stronger EUR, higher peripheral bond yields and more expensive interbank borrowing rates (Euribor). However, the dismal uptake suggests the ECB have not yet made lending and investment in the Eurozone attractive enough, and they must now resort to more drastic measures, potentially involving sovereign or private debt purchases (QE) - weakening the EUR and tightening peripheral yield spreads against Germany. Speculation surrounding further ECB easing measures will continue to be a hot topic heading into next week with a slew of ECB members on the speaker slate. Elsewhere for the Eurozone next week sees the release of the IFO survey, French GDP and a host of PMI figures.

USD/JPY

Once again USD/JPY managed to extend on its recent gains as broad-based USD strength dictated the state of play for the pair. The key focus for the pair this week was the FOMC rate decision which, although saw the Fed retain their considerable time phrase, was interpreted as hawkish as the release revealed a shift in projections which showed 14 members of the Fed now see the first hike appropriate in 2015 vs. 12 in June. This subsequently saw the USD-index surge to its highest level since 2010 with USD/JPY soaring above the 108.00 handle in the process. This move was then extended above the 109.00 handle with JPY weakness exacerbated after comments from BoJ governor Kuroda who said the BoJ sees no problems with current FX movements. Looking ahead, attention for Japan next week will turn towards the CPI and PMI releases. Stateside, attention will reside to US manufacturing & services PMI, durable goods orders, new home sales and the tertiary release of US GDP, as well as a host of Fed speakers.