The ‘Brexit’ has again been in the news over the weekend with the resignation of Iain Duncan Smith, the former Work and Pension’s Secretary. Although his resignation had nothing to do with the EU referendum why stop it getting in the way of a good headline. I’m so glad the EU referendum is just round the corner. Oh wait, it’s another three months away. Genius.
It seems the naming of Britains new Royal Research Ship, which will put British scientists at the forefront of ocean research, is of more interest at present to the British public. The Boat name currently in the lead? Boaty McBoatface. Yep, these same people will be voting in an EU referendum in the coming months. The mind boggles.
Turning our attention away from nautical names for a second, last week was a busy one on the currency markets. We had the BoE meeting, the budget and also the FOMC taking place.
In the run up to the budget last week Sterling fell against the Dollar the most in three weeks last Tuesday. Indeed, prior to the FOMC and the BoE meeting Sterling was the worst performing G10 currency over the past month.
The FOMC meeting took on a more dovish tone than expected and forced the dollar to weaken against both the EUR and Sterling. Janet Yellen referred to global economic and financial developments in her opening statement. It is clear that the FOMC is equally focused on risks to global growth as it is on domestic growth. They are now inextricably entwined. The FOMC still expects to raise rates considerably over the next couple of years, with inflation picking up somewhat and strong job gains. The FOMC’s median funds rate projection is still for a 100bp increase in 2017. This has dropped off however from December’s projections, where the FOMC saw 100bp in tightening in 2016. This has been trimmed to 50 basis points. This means that we’re still likely to see rates increase although it is now considered that two hikes rather than four will occur in 2016.
The Bank of England meeting was of course a non-event with rates kept at 0.5%. No change either on the Bank’s QE program keeping it unchanged at £375bn. A positive for Sterling came from a hint from the BoE that there may be a gradual rate rise in the future to ensure that we get inflation back to the target level. Sterling took on a bullish tone and this coupled with the dovish Federal Reserve meeting pushed Cable (GBP/USD) to fresh highs through 1.45 the figure. If you look at the graph below you can see the change in direction on GBP/USD.
Do I see the move higher continuing on GBP/USD? Nope. I think that move is now done. We were challenging the 1.40s on GBP/USD on Wednesday morning then we saw a sharp move higher in Cable (GBP/USD). The question is now whether we are going to have a weaker Dollar or weaker Sterling short-medium term? If you are a USD buyer I would consider locking in a portion of your US Dollars at current levels after the recent move higher. Please contact myself or one of the trading team for a SPOT rate.
If you are a USD seller please consider implementing market orders to the downside again at 1.44/1.43 and 1.42. Longer term aim for 1.40. Please also do consider converting a portion of your USD on a SPOT basis as historically, you are in an extremely good position at present.
I think EUR is in for another move higher pushing GBP/EUR lower. I feel GBP/EUR will target 1.25 to the downside again. We’ve had a few attempts to break the 1.26 level and I think we’re going to see a stronger Euro over the coming months with interest rates seemingly not going to move further into negative territory. If you are EUR seller and can achieve under 1.30 I would consider locking in a percentage of your exposure on a SPOT basis. Further to that, we can implement market orders below this level to take advantage of any upside moves in your favour. Please contact myself or a member of the Aston team for a rate of exchange. If you are a Euro buyer you may want to consider purchasing some Euro’s at current levels. Yes, we’re nowhere near 1.42 anymore although there is of course the possibility that GBP/EUR drifts back down towards 1.20 in the run up to the EU referendum. Think that’s too far to go? 1.20 a few years ago would have been considered a good rate to achieve.
Please get in touch with a member of the Aston team and we can put a strategy in place for you.
If you have any questions please do let me know.
Have a great week.
Written by Liam Alexander