Does the UK have something up its sleeve to pull the Pound out its mire? I think it’s about as likely as anyone knowing any of the contestants on the refreshingly "new" concept of a program called “Celebrity” Island.
Sterling/Dollar traded the beginning of last week around 1.33 the figure. We had inflation data out in the form of CPI figures that came in below estimates pushing Cable (GBP/USD) into the red. We danced around 1.32 to 1.33 mid-week after Wednesday’s upbeat Retail Sales figures out of the UK from August. That gave Sterling some impetus and we were around the 1.3240 going into the Bank of England meeting on Thursday last week. As widely expected, not a lot occurred after the August meeting. The Bank of England left monetary policy unchanged with the vote being unanimous. They also left the Asset Purchase facility unchanged at £435 billion. Importantly, they indicated that a rate cut before year end remains a possibility. The Bank of England did acknowledge that recent data had been stronger than expected although various recent business surveys have weakened. I would expect rates to be cut down to 0.1%. I would expect this to occur at the November 3rd meeting prior to the Autumn Statement from Philip Hammond. I’ll come back to this later.
On Friday we had further weakness on Cable (GBP/USD) with a loss of nearly 150 pips. You can see the downside moves last week on the graph below -
Sterling continued its malaise on the back of the Bank of England minutes and the US Dollar was lifted by better than expected inflation figures. Overnight, we broke through 1.30 to the downside although we have since recovered slightly this morning. I would expect that level to be challenged again later this week. If you are a USD buyer from GBP please do consider locking in some on a SPOT basis. Various analysts are predicting 1.28 on GBP/USD by end of year. I would suggest we’ll be slightly lower than this with Brexit talks likely to prove far more challenging that most imagine.
If you hold USD and are looking to convert back to Sterling please do consider locking in some of your exposure on a SPOT basis to take advantage of the move lower. We can then determine appropriate levels to aim for on a market order basis over the coming weeks and months.
The main event for the US Dollar is of course the FOMC meeting this week. Indicators suggest there is a 20% chance of a rate hike from the Federal Reserve. I think those odds are a little low although I do agree that we won’t see a rise in rates. I expect Janet Yellen, the Federal Reserve Chairperson to acknowledge the improved inflation figures and also the mixed data of the past few weeks out of the US. I would expect language to remain slightly hawkish and give us further indication that a December hike is likely. If we have a surprise and rates are raised then you can expect to see a significant strengthening in the US Dollar. Please contact a member of the Aston team to discuss your requirements prior to the meeting on Wednesday.
GBP/EUR has come off from highs in the past couple of weeks. We have settled in a range of 1.16-1.1750. You can see the movements on GBP/EUR for last week on the graph below –
There is very little data out this week after a heavy schedule last week. We have Mario Draghi, the ECB President, speaking on Thursday although I don’t expect any revelatory insights. Normally, August is a month when we have larger swings in the currency markets due to a lack of liquidity and volume in the markets. September is normally the time when traders get back to their desks and things settle down into a bit more of a pattern. The opposite has been true this year. Expect further volatility in the coming weeks and months so please do make sure you have a plan in place to mitigate your currency risk. There are numerous global risk events and with monetary policy losing the battle various Central Banks are running out of ammunition to do much. I think, in the coming 12-24 months we’re going to see more of leaning towards Fiscal Policy. The UK has the Autumn Statement from our Chancellor, Phillip Hammond, on November 23rd. I expect him to go down the road of Fiscal stimulus in terms of infrastructure projects. Whilst not the shot in the arm Monetary Policy can provide it is the road he’ll go down. This is why we’ll see a cut in rates in November, I think, although most certainly by December. Why? Well, how do we get more money in the Government coffers to pay for infrastructure spending? Cut the rate to bring down borrowing costs for the Government.
As stated numerous times I don’t see much weight behind Sterling unfortunately. With reports out suggesting that Brexit talks are going to prove incredibly tough, potential sanctions and law suits if we discuss trading terms with any partners prior to us issuing Article 50 then I think the UK is going to be in for a tough few months. The beginning of 2017 is when the real dogfight begins for UK PLC. Please do start speaking with a member of Aston to look at your hedging requirements not just for the next 3 months but out for 6-12 months.
If you have any questions or would like to discuss your currency requirements please do get in touch.
Have a fantastic week
Written by Liam Alexander