The UK Governments position on ‘Brexit’ is about as easy a read as casually sifting through the James Joyce novel Ulysses. Will we get any clarity prior to Christmas? It’s about as likely as anyone caring if Cruz Beckham or Cliff Richard is Christmas No. 1 in the UK.
Where is Sterling/US Dollar likely to go over the coming weeks? I expect a move lower. We had a push to the upside last week and broke through resistance levels around 1.27 the figure. The rally has failed to sustain. We had a downside move to test support around the mid-1.25s with a slight bounce in early trading Monday morning to challenge 1.26 the figure. The move lacks momentum so I expect downside pressures to resume on Cable (GBP/USD) towards the end of the week. Do you have a requirement to purchase USD from GBP prior to Christmas or over the festive period? If so, it may be prudent to consider covering off some of your exposure on a SPOT basis.
If you can achieve over 1.25 I would suggest this is a good level to lock yourself in. If you would like a rate of exchange please contact either myself or a member of the Trading team. If you think Santa Claus is likely to sprinkle some festive cheer on Sterling consider placing a market order around 1.2650/1.27 to take advantage of any upside moves on an intraday basis.
You can view the movements on Sterling/US Dollar last week on the graph below –
I think Sterling is going to come under pressure in the coming weeks with the US Dollar expected to continue the ascendency. The Federal Reserve are expected to raise rates by 25bp this week although this is largely priced in. I would expect a small move to the upside after the announcement for the Dollar. What will be interesting to look at in the coming weeks/months is the expected number of rate rises in 2017. The US economy is showing positive signs. Employment data is favourable and a strengthening US economy will encourage investors to shift out of Government Bonds and into riskier assets. We’re going down a different track now with Trump. Expect Fiscal Stimulus to encourage higher growth and higher inflation so that will largely erode the value of bonds over time so expect a continuing sell off on that front. I’ve said for a long time that I expect Cable (GBP/USD) to challenge and break through 1.20 to the downside in the not too distant future. I bore you to tears with the statement ‘doing nothing is speculating’ although please do make sure you have a plan in place over the coming weeks and the first week of January. Volatility will continue apace even when everyone is tucking into mince pies and eating chocolate at 8am between Christmas and New Year.
If you have a requirement to sell USD into GBP I would consider placing a market order to execute at 1.25 the figure. Then consider staggering orders at 50 pip intervals to the downside. Might GBP/USD shift higher prior to the main risk events of the Federal Reserve meeting and ‘Super Thursday’ in the UK? Quite possibly. I would attribute this to nothing more than short covering by traders. Please get in touch to discuss your individual requirements with a member of Aston and agree appropriate levels to aim for.
Markets will turn their attention to the UK for the excruciatingly painful named ‘Super Thursday’. It’s likely the interest rate will remain on hold at 0.25% and asset purchases at £435bn as uncertainty abounds for UK PLC. Could the BoE do something out of character and spring a surprise with a rate move? Possibly, although the consensus is that rates will remain on hold. Prior to Super Mario, I mean Super Thursday, we have inflation data out of the UK on Tuesday. Expectations are for the target rate (2%) to be exceeded next year. We expect a jump in CPI (Consumer Price Inflation) from 0.9% in October to 1.2% for November. That will be the biggest jump since October ’14. The cost of the weekly shop for consumers is going to continue apace with the fall in Sterling contributing to higher inflation in the form of higher priced imported goods against relatively low wage growth.
What is on the cards for Sterling/Euro? This really is an ugly parade. I think the single currency slightly shades it with the fabric of their clothes coming apart at the seams. The UK seems to have a double stitch on the go so we should see ourselves through the winter months. Come March we may need an entire new wardrobe though to fend off the bitter chills blowing across from Europe to the UK. Italy, as I’m sure you’re aware, is delving into the realms of implosion and potential social unrest with the disaster of MPS (Monte dei Paschi). Their request for more time to raise circa 5 Billion Euro’s to reduce the burden of bad debt has been turned down by the ECB. Chance of them finding funds before 31st December? About as likely as anyone knowing all the words to Auld Lang Syne. They’ve been bailed out three times before and with the resignation of Prime Minister Renzi last week any offers there were have been taken off the table. What happens next? Government either bails it out, breaking EU rules, or apply for the Bank to be rescued then the Bank comes under direct control of the EU. What does all this uncertainty mean? I expect EUR to weaken and if Sterling can at least old firm and not drift lower then we’ll see GBP/EUR break back through the 1.20 level to the upside.
You can see the movements last week and the volatility of Sterling/Euro on the graph below –
If you have a requirement to purchase Euro’s from Sterling please do get in touch and we can look to cover off a portion of your requirement on a SPOT basis. I think EUR/USD moves lower so there will be further upside for Sterling/Euro going into year-end so consider placing market orders to try and ‘average up’ your rate of the past 3 months where it’s been in the relative doldrums. Please contact me directly if you would like to discuss levels to execute at.
Do you have projections for Q1 ’17 on your potential payments that need to be made? If so, have a think on whether a Forward Contract may be beneficial to mitigate some of the risk and expected volatility for January through March. Might Sterling/Euro continue to push higher throughout next year? Quite possibly. There are far too many political variables to consider outside of economic arguments for anyone to have a firm idea on where things will likely go. Protect yourself against adverse movements by having a plan in place. Feel free to contact a member of the Aston team to discuss.
The middle and end of the week will likely shape direction for GBP, EUR and USD for the remainder of the year. Please get in touch and we can put a plan in place.
Have a fantastic week and any questions please do let me know.
Written by Liam Alexander.