Sterling will come under pressure over the coming months. There isn’t any foundation for GBP to gain any traction and mount a sustained upside move. By Q3 I would expect GBP/USD (Cable) to be under 1.25. Yes, some of the uncertainty has been removed by having a Government in place and Theresa May as Prime Minister. However, with a recession looking all but likely, UK Growth figures being cut, PMI (Purchasing Managers Index) figures being at the worst level since 2009, an expected interest rate cut in August by the Bank of England and potentially a further injection of QE (Quantitative Easing) then it’s a bumpy journey down a cobbled street for Sterling.
If you need to purchase US Dollars please do consider locking in some at current levels. If you can achieve over 1.30 on GBP/USD I would suggest this is a good level. We now have to get used to these new ranges on Cable. We hit the dizzying heights in the 1.32’s on GBP/USD last week and then came off again. We’ll see Sterling jump around a lot over the coming months although it will maintain a downside bias. Contact a member of Aston to discuss your upcoming requirements. You can see from the graph below the shifts in GBP/USD last week.
We have the Federal Reserve meeting this week and although I expect them to maintain the cautious language I expect them to sound a slightly more positive tone. The US economy is trundling along quite nicely all things considered. We have Durable Goods orders out this week and this should give us a better idea on the US economy. Yes, they have their own political situation to contend with in the form of Trump versus Clinton although I don’t expect that to become a real influence on the US dollar for another 4-6 weeks. If you are a USD seller back to GBP consider market orders at 1.30 the figure to execute at. Please contact myself or a member of the trading team to implement these.
GBP/EUR is following much the same pattern as GBP/USD. Trading last week was choppy with Sterling failing to hold the upside momentum, as can be viewed on the graph below.
As stated a few weeks ago I think problems in the Italian Banking system will become more of a story as the ECB may have to bend its own rules to allow a state bailout without private creditors taking a loss. Problems in the Eurozone aren’t going away anytime soon and with increasing political tension from various right leaning parties in numerous countries I only see further weakness for the single currency. Couple the political problems with the never ending slow growth story in the EU then I feel we’ll see some EUR weakness in the coming month(s). What does that mean for GBP/EUR? If Sterling can get a foothold above 1.20 then it may have the chance to see out levels ranging from 1.20 – 1.25 the figure over the coming months. I must stress however that any upside move on GBP/EUR will be solely down to EUR weakness than Sterling strength. On Friday this week we have GDP (QoQ) and (YoY) (Q2) out of the Eurozone that will give us some more idea on short-term direction.
If you need to purchase Euro’s from GBP I would suggest implementing a market order at 1.20. This will allow you to achieve a competitive rate in current market conditions. Yes, we may see GBP/EUR move a little higher although for the moment downside risks remain on Sterling. There are a multitude of events in the coming weeks that will likely weaken GBP. We have Lloyds and Barclays Bank posting earnings this week and I’d be surprised if there is much to cheer about. If you need to sell Euro’s back to GBP then I would consider locking in some of your requirement on a SPOT basis and then market orders for the remainder of your exposure.
The FX landscape and environment is going to change dramatically month to month although for now Sterling downside seems to be inevitable. Please make sure you have a plan in place to mitigate your currency risk over these volatile times.
Any questions or if you would like to schedule a call with a member of the Aston team please do let me know.
Have a great week.
Written by Liam Alexander