Will this be the month Cable (GBP/USD) falls through 1.20 the figure? Will Sterling/Euro continue its recent downtrend? Heading into Brexit negotiations we should perhaps listen to some of the lyrics of Nat King Cole for inspiration “There may be trouble ahead, Let's face the music and dance. Before the fiddlers have fled, Before they ask us to pay the bill, And while we still have the chance, Let's face the music and dance”. ‘Brexit’ kicks off in earnest this month so volatility is going to increase substantially. Hopefully Theresa May and Phillip Hammond will take the lead and put the first foot forward onto the dancefloor.
This month is going to give us a firm understanding of the direction Sterling, the US Dollar and the Euro is going to take in the coming months. The main market movers are still reflation, Trump, ‘Brexit’, and European populism as certain political party movement is now known.
Let’s kick off with Sterling/Dollar. Up, down or ring a ring a roses? We were trading around the hallowed turf of 1.25 for a while although the floodlights have since went out and Cable is looking for an exit. You can view the movements on Sterling/Dollar last week on the graph below –
Will Sterling move further south? We have tried to settle above the 1.25 figure although we haven’t managed to hold gains. I see us targeting 1.20 the figure this month. First off, we have the Spring Budget on Wednesday in the UK where the red briefcase will be dusted off once more. It will be a case of steady as she goes and I don’t expect any outlandish claims or promises from the Chancellor of the Exchequer, Phillip Hammond. It will be a case of balancing the books, no wild spending sprees, keep some gas in the tank. Whilst UK figures to date have been resilient the UK Chancellor will not want to cash in his chips this early in case we see a downturn over the next couple of years. This is the right approach. We had some disappointing data out from the Services sector with February printing 53.3, down from 54.5 in January. A sign of an upcoming slow down? Perhaps. Will some quarters want the UK Chancellor to shout from the rooftops that the UK will storm ahead and go down the spending route? Absolutely. Would he be right in doing so? Absolutely not. A measured and calm approach is what is required to see us through the choppy waters ahead.
We know Sterling is largely driven by politics at present and this isn’t going to change for the foreseeable future. If you have a requirement from Sterling into another currency over the coming months please get in touch with a member of the Aston team to put a plan in place. Moves in Sterling could be in the percentage points. Please feel free to contact me directly.
How are things going for our cousins across the pond? A rate hike is now on the cards for the March meeting. US data has been consistent without setting the world on fire. There was a neutral stance from the Fed in raising rates although that has since shifted to a more than likely chance of a hike. Why? Is it all down to improving US jobs numbers, wage growth and Retail Sales moving in line with FOMC (Federal Open Market Committee) projections? It does of course play a large part. Why the move now? Allied to the domestic data is the improvement in the international outlook. The US has held back from raising rates with the ongoing uncertainty and challenges surrounding China and ‘Brexit’. Whilst challenges remain Global turmoil has receded somewhat. The ongoing European recovery is also calming nerves. I would be surprised if the US doesn’t raise rates this month.
What should a rate rise do for the US Dollar? The Dollar should strengthen. With Trump’s policies, as incoherent and as yet not fully formed as they are, they are growth supportive. There should be a move higher in the US Dollar and also US equities. We have the NFP (Non-Farm Payroll) figure out this Friday and whilst I don’t think we’re going to see a higher figure than last month printed we’ll be around the 180-190K mark on Friday. When this comes in it’ll likely provide a spike in the Dollar. If you are a USD buyer from GBP can you afford Cable (GBP/USD) to be trading around 1.19 in the near future? Please do consider locking in some of your USD exposure on a SPOT or Forward Contract basis.
If you are USD seller consider staggering market orders to the downside. Please get in touch with the Trading team to implement orders to execute.
The lofty heights of 1.18 are now as distant a memory as David Haye’s Boxing career. Will we break through the psychological figure of 1.15 to the downside in upcoming trade? We’ll see some support at that level although I expect us to break through it and target 1.14 the figure in March.
You can view the movements on GBP/EUR last week on the graph below –
Can I see GBP/EUR pushing higher this year? Absolutely. Once we have commenced Brexit the story will move from being a Sterling weakness story to that of how does this threaten the EU. It will become a EUR weakness story at the same time. With the aforementioned European Populism movements who knows what kind of EU we will be negotiating with in the next couple of years! Although the European economy is improving it isn’t exactly champagne cork popping time. We have Eurozone GDP due out tomorrow and the ECB interest rate decision and Monetary Policy Statement due on Thursday this week so comments from the ECB President, Mario Draghi, will be keenly watched. If we start to see a divergence in interest rates again between the US and the Eurozone what will this do for EUR/USD? It will likely push the pair back to challenge 1.03/1.04. Will it go to parity? Unlikely.
This month there is going to be a number of risk events that are going to move currencies perhaps substantially.
Please make sure you contact a member of the Aston team to put a strategy in place to mitigate your currency risk.
Any questions please do let me know.
Have a fantastic week
Written by Liam Alexander