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Correlation breakdowns are pointing to a regime shift in FX markets. With Fed expectations less dominant, GBP/USD and USD/CAD are thriving in a low-volatility, risk-on environment.
- USD correlations with Fed cuts fading as volatility takes over
- Risk appetite remains strong, lifting GBP and CAD against USD
- GBP/USD regains uptrend and 50DMA, momentum tilting higher
- USD/CAD breaks wedge pattern, momentum now favours sellers
GBP/USD, USD/CAD Outlook Summary
A changing of the guard may be underway when it comes to what’s driving the G10 FX universe, with focus on the US interest rate outlook diminishing over the past week, replaced by greater attention on broader risk appetite. While the jury is still out on the US dollar’s once-concrete safe haven status, notably, it’s struggled in an environment of declining volatility and surging risk assets over the past fortnight. Should that trend persist, the path of least resistance for the dollar may continue to be lower.
Return of USD Safe Haven Status?
Source: TradingView
The first chart looks at the rolling 10-day correlation between major G10 FX pairs and select market instruments over the past fortnight. On the left, we have market pricing for Fed rate cuts this year based on futures, with VIX futures on the right. Regarding the FX pairs, EUR/USD is shown in black, USD/JPY in red, GBP/USD in blue, USD/CAD in yellow, and AUD/USD in green.
As discussed in posts over the past week, there had been a strong relationship between the FX universe and Fed rate cut expectations earlier in July. However, that relationship has waned in recent days, as demonstrated by the lower correlation coefficient scores.
Interestingly, correlations with VIX futures have strengthened over the same period, with lower anticipated US stock market volatility often coinciding with gains in major currencies against the US dollar.
While the US dollar has often fluctuated in line with moves in benchmark 10-year Treasury yields—suggesting rate differentials may be a factor—it’s notable that as the trickle of trade agreements being reached with the US government has accelerated ahead of the August 1 reciprocal tariff deadline, Treasury yields have generally been moving lower, reversing the trend seen when trade tensions were escalating.
As many analysts noted at the time, Treasuries were unusually behaving like riskier asset classes, so the recent rally fits with the moves seen in other assets further out the risk spectrum over recent weeks. It also hints that the US dollar may be slowly recapturing some form of safe haven status, with buoyant risk appetite helping to boost other currencies. The theory is yet to be tested as we’ve not seen a major market drawdown for a while, but it will be interesting to see what happens when the next non-US government-initiated market wobble eventuates.
For now, it appears to be boosting the likes of the British pound and Canadian dollar against the greenback.
GBP/USD Bearish Break Rapidly Reversed
Source: TradingView
Whether you’re talking price action or momentum, directional risks look to be tilting higher for GBP/USD in the near term. The break beneath long-running uptrend support didn’t last long with the pair attracting bids on dips below horizontal support at 1.3370. That may have contributed to the bounce seen this week, taking Cable not only back above the uptrend but also the important 50-day moving average and 1.3530—the latter a level that provided both support and resistance over the past month.
The intersection of the uptrend, 1.3530 and 50-day moving average is now the key downside zone to watch, providing a potential base to build long setups around should we see a pullback. As for targets, offers may be encountered at 1.3600, with a push above that big figure opening the door for a run toward minor resistance at 1.3676 and the July swing high.
Momentum indicators are shifting bullish, with RSI (14) comprehensively breaking its downtrend last week before pushing back above 50. MACD has also crossed the signal line from below and is on the cusp of moving above zero. It’s a more neutral picture rather than outright bullish, but it’s trending in that direction.
Of course, if GBP/USD were to reverse back below the support zone and hold there, the bullish bias would be invalidated.
USD/CAD Eyes June Swing Low
Source: TradingView
The Canadian dollar looks like it may have resumed its broader strengthening trend against the US dollar, with USD/CAD breaking the rising wedge it had been trading in last week after struggling to overcome sellers parked above 1.3750. The subsequent bearish break saw the pair slice through support at 1.3650, leaving it dangling just above the swing lows set in June. Convention following the wedge break suggests USD/CAD should retest 1.3550 again, although the bounce from just above the level earlier this month warns the near-term path for bears may be tricky.
1.3650 remains the first topside level of note with 1.3550 the same on the downside. That’s the initial range to trade. If the latter were to be broken, 1.3500 will be in focus, with a push beyond that level bringing a retest of the September 2024 low of 1.3420 on the radar. If 1.3650 were to break on the upside, 1.3750 would naturally be seen as a target for longs.
The momentum picture has shifted from bullish to mildly bearish recently, favouring selling rallies. RSI (14) has pushed below 50 while MACD has crossed the signal line from above—albeit in positive territory.