December is fast approaching. That means Christmas songs will be played on an apocalyptic scale akin to a swarm of locusts darkening the skies of Madagascar. Take cover people. Will December prove to be a joyous month for Sterling, the US Dollar or the embattled single currency the Euro? I expect the US to be eating Goose, the UK to be eating Turkey and the Eurozone to be feasting on the delights of Spam. 

Where is Sterling/Euro going? It had a shift higher and challenged the mountainous highs of just over 1.18 the figure. Sterling has had a raft of positive figures out over the past week with UK GDP figures showing the economy expanded at an annualised 2.3% during Q3. Will this ‘UK is shrugging off Brexit’ continue apace? I have my doubts. Whilst I don’t think we’re going to see the end of days I expect inflation to push up considerably next year meaning there will be a stagnation in income so with less coins in the pocket consumer spending is likely to tail off. Those TV’s bought on Black Friday will need to do some people for a while yet. What sector has kept the economy going? Shock horror, the services sector. All others are contracting. Will we see business investment in the UK suffer and economic growth in the UK stutter next year? Yep. Forecasts have been cut although not as aggressively as many perhaps thought.

So, Sterling is likely to drag early next year. To answer the question posed above of ‘where is Sterling/Euro going’ I think we’re going to see a gradual move higher. Reason being? We have the results of the Italian constitutional referendum next week and in addition to that the Italian Banking system is sleepwalking into crisis. Should the Italian Government lose the vote then expect market sentiment to take a nose dive towards Italy. This will then spread to the rest of the Eurozone as the Italian lender Monte dei Paschi di Siena (MPS) holds around 1/3 of the Eurozone’s non-performing loans so expect the word ‘contagion’ to become part of the markets vernacular once again. 

Sterling has achieved 4 straight weeks of gains against the Euro rising by 5%. You can see the movements on GBP/EUR last week on the graph below – 

GBP/ EUR 1 Week

If you hold Sterling and need to convert into Euro look to take advantage of the recent moves to the upside. Please get in touch with a member of the Aston team to cover off some on a SPOT basis. If you have requirements going into the last month of 2016 consider placing a market order to try and take advantage of any upcoming EUR weakness. Contact a member of the trading team to discuss appropriate levels to aim for over the next month.

Selling EUR back to GBP? Take advantage of any moves to the downside should the break higher run out of steam.

Sterling/US Dollar

Sterling/US Dollar has climbed significantly over the past couple of weeks breaking 1.25 the figure to the upside although selling interest has taken place driving cable (GBP/USD) back down. The Dollar post the Trump election victory has been surging and I expect Dollar strength to continue going into year end. Indeed, this morning Cable (GBP/USD) has come off around 100 pips due to resurgent demand for the Dollar with EUR/USD paring gains and Sterling/Euro taking a hit as a result. 

If you have a requirement to purchase USD from GBP I would suggest considering some on a SPOT or Forward Contract basis. Please get in touch for a rate of exchange. If you are selling USD back to GBP I would suggest we’ll see further moves in your favour so consider implementing a market order at 1.23/1.2250 to take advantage of expected downside moves.

You can view the movements on Cable (GBP/USD) on the graph below –

GBP/USD 1 Week

We of course need to see how Trump’s policies will play out although I think we’re going to see the ‘divergence’ trade take place with the Federal Reserve widely expected to raise rates. Apparently there is “100%” certainty although unless the Fed Chairperson, Janet Yellen, as unequivocally said so I’m not sure how analysts arrive at the 100% figure. I do expect rates to be raised so that should provide the dollar with fresh impetus so expect to see GBP/USD and EUR/USD push lower as a result. There is market talk of EUR/USD heading to parity. If it is ever going to happen I would suggest December or Q1 ’17 is when that will be realised.

Before we have the Federal Reserve meeting in December market attention will focus on the ECB President, Mario Draghi, speaking today and Wednesday, the US GDP report tomorrow, then Wednesday’s OPEC decision and Thursday’s BOE Financial Stability report and ISM Manufacturing data out of the US on Thursday for fresh incentives on direction for Cable (GBP/USD). The week will be rounded off by the NFP (Non-Farm Payroll) figure released on Friday.

Whilst the economic data will of course move markets politics will be the main driver for the foreseeable future for the majority of G10 currency pairs.

With FX market volatility expected to continue please get in contact with your relationship manager to discuss your individual requirements. 

If you would like to discuss any of the above with me feel free to contact me directly.

Have a fantastic week. 

Written by Liam Alexander.