Good news for the UK finally. No, not in an economic sense. That really would be a wonderful achievement. Murray won Wimbledon for a second time. Chances of Sterling rising this week against the US Dollar? About as bright as the Russian spies that graduated from the FSB and then put pictures of themselves on-line.
Sterling is going to come under further pressure this week. We have the Bank of England Quarterly Bulletin due out tomorrow and it doesn’t take a genius to work out it isn’t going to be packed with lots of good news. Following this we have the Bank of England interest rate decision and minutes released on Thursday. Might they do nothing and adopt a wait and see approach and hold off till next month? Possibly. However, I’m leaning towards a 25bps cut to the rate and the resumption of QE (Quantitative easing). They’ll probably fire up the printing presses again to the tune of potentially 300 Billion at some point. Sterling hit a 31 year low against the US Dollar week and I would expect this level to be broken again this week. You can see the downward trend on Cable (GBP/USD) from June 22nd to this morning below.
We had consumer confidence data out on Friday from the UK and that hit a 21 year low. As expected, the fallout from ‘Brexit’ has continued. There aren’t many happy campers in the UK at present. There are more tears than Cristiano Ronaldo. Some are suggesting Mark Carney, the BoE Governor, will cut by 50 bps this week although I think that’s a bold shout. Could we possibly follow the Eurozone and establish NIRP (Negative Interest Rate Policy) at some point? I doubt it very much and hopefully not as we have enough acronym’s and jargon already. The Bank of England will not want a hit on UK Bank profits and negative rates would also discourage lending. I would expect a further weakening of GBP to come and that will drive up inflation as imported goods become more expensive. I think the UK will concentrate on boosting the economy rather than focusing on inflation. Are you a USD buyer? I would suggest considering purchasing some USD on a SPOT basis. Yes, we’re under 1.30 although I think it’s a matter of time before there is a further shift to the downside and we break through the psychological support level at 1.25 the figure. Please contact myself or one of the trading team for a rate of exchange.
If you are selling USD back into GBP or EUR then consider locking in a large portion of your exposure on a SPOT basis with a percentage left to work on a market order basis. As stated above, I expect the rate to improve further. Take some risk off the table and cover some off on SPOT to take advantage of 31 year highs. The US economy isn’t likely to raise rates this year and perhaps not well into 2017 now. We had a strong NFP (Non-Farm Payroll) figure released on Friday with 287K jobs added in June. Jobs are rising in the US, share prices are stabilising, the Banks have passed stress tests and wages are rising. All things considered the US is trundling along nicely. Add this to the likely devaluation of GBP then you’ve got a double hit on Cable (GBP/USD) that will likely push it lower. Please give me a call to discuss your individual requirements.
GBP/EUR is less of a one way destination. You can see from the graph below the fall in GBP/EUR from June 22nd to now.
Where do I think GBP/EUR is heading? I expect a further shift lower short-term although I think we are yet to see some of the Eurozone issues unfold. If we take Italy as an example their Banks are far from firing on all cylinders. The Prime Minister, Renzi, wants to shore up the Banks with taxpayers cash. The EU want to see private creditors take a hit in the pocket before this happens and are unlikely to give the Italians special terms otherwise other nations will follow suit. They are having a political and economic standoff at present. I would expect this to become more of a news story in the coming weeks and we’ll have EUR weakness. ‘Brexit’ is going to spill over to the Eurozone and the UK/EU political arguments are going to increase in the coming months. I expect GBP/EUR to be more stable than GBP/USD and if anything I expect GBP/EUR to push up towards the end of the year. If you are a EUR buyer I would look to establish market orders at levels to the upside to try and execute at. Please contact the trading team to discuss appropriate levels to aim for. Do you need to convert EUR into GBP? Take advantage of current levels on a SPOT basis and look to work market orders prior to the Bank of England meeting on Thursday.
Volatility is going to remain for the foreseeable future. Please do get in touch with your point of contact at Aston to discuss your upcoming requirements and put a plan in place.
If you have any questions please do let me know.
Have a great week.
Written by Liam Alexander