Liquidity beats geopolitics in FX

Risk assets keep climbing even as headlines warn of new geopolitical shocks. For now, cash is doing the heavy lifting. Ample liquidity and expectations of easier global policy are overpowering the usual flight-to-safety impulse. That mix is showing up most clearly in currencies, where high-yield plays are still attracting buyers and low-volatility conditions are helping trends hold.

Sterling is a quiet winner in this backdrop. After a rocky spell in UK bonds last week—with dramatic chatter about an IMF bailout—the mood has calmed. Gilt auctions are clearing without drama, a sign that when pricing adjusts, buyers are there. The UK’s £4bn six-year gilt sale scheduled for today is another test of that demand, but recent activity suggests the government is placing debt without unusual strain.

In the FX market, EUR/GBP is stuck in a tight 0.86–0.87 range. That narrow band tells you a lot: volatility is low, positioning is measured, and the rate gap still favors the pound. With UK policy rates higher than those in the eurozone, holding sterling pays a positive carry. That makes shorting GBP expensive to maintain, which helps pin the cross.

The near-term calendar could nudge that range but may not break it. UK jobs and CPI data are due before the Bank of England meets next week. If the data do not undershoot in a big way, the meeting should lend support to sterling. Analysts continue to look for EUR/GBP near 0.87 by year-end and GBP/USD around 1.38, arguing that a broader dollar downtrend will reassert itself as US rate cuts come into view.

None of this means geopolitics have disappeared. It means markets, flush with liquidity and conditioned by years of central bank backstops, are prioritizing carry and momentum until they are forced to do otherwise. If the calm breaks—whether via a sharp risk-off move, a hawkish surprise, or a funding squeeze—these trades can unwind fast. But that is not today’s tape.

EMFX: Carry stays hot, with event risk in Turkey

The current low-volatility backdrop has kept the carry trade in the spotlight. With investors expecting the Federal Reserve to cut rates in the coming months, the US dollar is increasingly used as a funding currency. That creates room for higher-yielding markets to shine, at least while price swings are contained.

An equally weighted USD-funded basket of the Turkish lira, Egyptian pound, and Hungarian forint is up 3.6% quarter-to-date, mainly from interest accrual rather than spot gains. It’s a textbook carry profile: steady positive carry with limited currency moves, supported by benign volatility. Analysts led by Chris Turner at ING say it’s hard to argue against carry in this environment, given the policy path markets are pricing and the tight ranges across major FX pairs.

There is, however, a clear near-term risk marker: a significant court case in Turkey on September 15. That date matters for positioning because the lira sits at the center of many EM carry baskets. While analysts expect Turkey’s central bank to manage any temporary outflows or volatility around the event, the timing is awkward for leveraged strategies that rely on stability. If volatility jumps, funding costs can spike and stop-losses can cascade, even if the medium-term story hasn’t changed.

Why are these specific currencies in focus? Policy rates. Central banks in Turkey, Egypt, and Hungary have all run tight monetary stances to contain inflation and stabilize their currencies. The yields that come with those policies are attractive when global volatility is low and US rates are expected to fall. But those same trades are sensitive to shifts in inflation expectations, domestic politics, and headline risk.

For investors, the mechanics are simple but unforgiving. You borrow in a low-yield currency and invest in a high-yield one. As long as the exchange rate doesn’t move against you too much, the interest you collect outweighs small currency drifts. The danger comes when volatility spikes or policy surprises hit—your funding costs rise and the currency you own can drop faster than the carry you’ve earned.

Key watchpoints over the next two weeks include:

• UK data: Employment and CPI prints that shape expectations for the Bank of England’s meeting.
• BoE decision: Guidance on the rate path and balance sheet, given still-sticky services inflation.
• US policy signals: Any shifts in Fed rhetoric that change the timeline or pace of expected rate cuts.
• Turkey event risk: The September 15 court case and the central bank’s response if markets wobble.

Back to sterling. The “expensive to short” dynamic matters for GBP because real money and macro funds weigh carry when setting positions. If the BoE avoids any dovish shock next week and data hold up, sterling can grind higher against low-yielders and stay range-bound versus the euro. A break of the 0.86–0.87 corridor would likely need a sizable data surprise or a broader risk-off move that boosts the euro as a regional safe haven.

As for the dollar, the debate is about timing, not direction. A softer US growth pulse and signs of cooling inflation have markets looking for rate cuts ahead. If those expectations stick, the funding tailwind remains in place for EMFX. That supports the carry trade until either US data re-accelerate or a geopolitical shock forces a rethink.

The bottom line for now: liquidity is calling the shots. Gilt markets are functioning, sterling enjoys a rate cushion, and EM carry baskets are paying out. The risks are known and dated—UK data in coming days and Turkey on September 15—and the response from central banks will likely decide whether this calm extends into the next quarter or gives way to a bout of turbulence.