Sterling staged a comeback last week and is now off the ropes with short positions slowly being unwound. Will Sterling be able to keep the positive tone and deliver a stoppage to the US Dollar akin to Anthony Joshua versus Klitschko? How will GBP fare against the resurgent Euro? What is for sure is that Brexit negotiations look set to be as bloody as the world heavyweight fight over the weekend.

Sterling/Dollar is currently flirting with 1.29 the figure. A softer US Dollar has aided the move. Will we break through the psychological level of 1.30 in upcoming trade? There are a number of central bank meetings this week alongside data that will give us an indication on direction.

You can view the moves last week on Cable (Sterling/Dollar) below –

GBP/USD 1 Week

Data out of the UK is likely in the coming months to prove as mixed up as a ‘flexitarian’. UK Manufacturing PMI data out this morning surprised to the upside printing a three year high of 57.3 against consensus expectations of 54.0. A weak sterling has helped manufacturers sell more to the Eurozone. We’re back above the 1.29 handle on the back of the release. This is likely to be a short-term bounce. If you have a requirement to purchase USD from Sterling do consider covering off some on a SPOT basis to take advantage of the recent move higher and lock in gains. Do also consider placing market orders at 1.30 the figure should we see a further move to the upside. Please contact the trading department for a rate of exchange and to implement orders.

We have the Federal Reserve meeting on Wednesday this week. No rate rises are expected although the language from the FOMC (Federal Open Market Committee) will be keenly watched to see if a June rate hike is on the cards. Should we hear any hints then this may be dollar supportive short-term.

In addition, we have the NFP (Non-Farm Payroll) figure released on Friday. We had a poor figure out in April (98K) and I expect a stronger and closer number printed in line with consensus estimates of around 180K for May.

If you are selling USD back to Sterling I do think we are going to see some weakness in GBP. We expect consumer spending to slow further throughout this year. Earnings growth is likely to fall further with inflation ticking up with negative real wage growth kicking in. Household spending will likely contract. I expect Sterling to struggle to post heavy gains this year with risks to the downside. One small upside in things is the news that avocados are likely to double in price. That’ll hopefully stop millennials and hipsters posting pictures of avocados everywhere.  

Sterling/Euro

You can view the price movements on GBP/EUR on the graph below –

GBP/EUR 1 Week

The EUR is likely to post further gains this year against the US Dollar that should in turn move Sterling/Euro lower. We expect GBP/EUR to trade in a range this year of 1.15-1.25 with not too much movement either side of this. Sterling/Euro will be largely driven by ongoing political uncertainty and the outcome of ‘Brexit’ negotiations. The UK Prime Minister, Theresa May, has strengthened her hand by calling a General Election. I will eat my hat if the Conservatives don’t win the election with a large majority. This has removed some uncertainty. However, if various reports are to be believed then the UK and the EU are galaxies apart in their thinking on the talks process. Can these chasms be closed or could we potentially have no deal in place on our exit from the EU?

The Euro has been boosted from the French elections and the likely outcome of the result being in line with the polls. Evidently pollsters have got more wrong than right recently although we expect a Macron victory. This removes any ‘Frexit’ risk. The ECB meeting last week was slightly more dovish in tone than expected although I except a more hawkish tone over the coming months from Mario Draghi, the ECB president. We had manufacturing data out of the Eurozone this morning that came in at six year highs printing 56.7.

I expect a slow but steady improvement for the Eurozone this year that should firm up the Euro. We have growth figures out of the Eurozone on Wednesday with preliminary GDP readings expected to print 0.5% for Q1’ 17. I expect the EUR/USD pair to move higher.

You can view the EUR/USD movements over the last week on the graph below –

EUR/USD 1 Week

The next hurdle will be the 1.10 figure. Should we break through that and see a sustained settlement above here then this will open us up for further moves higher on an intraday basis.

If you have a requirement to purchase Euro’s from Sterling and can achieve above 1.18 in the coming weeks I would suggest this is a good level to lock in at. Please contact the trading department for a rate of exchange. If you are selling Euro’s back to GBP then our suggestion would be to implement market orders at 1.1750 and lower to take advantage of any Sterling weakness.

Moves will continue to be exaggerated with the political and economic landscape changing on an almost daily basis.

Please make sure you have a plan in place and a strategy so you avoid being on the wrong side of any sharp movements. Feel free to call me directly for a conversation or speak with the trading department to cover off some of your exposure.

If you have any questions please do let me know.

Have a fantastic week.

Written by Liam Alexander