“When will I, will I, be famous”. Yep, the 80’s band Bros has made a comeback folks. We have the Jackson Hole Symposium this week in Wyoming where the ECB President, Mario Draghi, will be the star of the show. Perhaps Draghi will respond to questions on the value of the Euro and monetary normalisation with a mixture of evasive guile using the following lyrics from the aforementioned hit “I can’t answer that, I can’t answer that”.
We have traded under 1.0950 on Sterling/Euro. A seven year low. Do you hold Euros? If so, lock in 50% of your exposure back to Sterling on SPOT this week. Why? Firstly, it de-risks your position and you can then take a view on the remaining 50% next week. The two questions I alluded to above will come into focus this week. The value and strength of the single currency and a word that is going to be used more and more in the coming months; normalisation.
Is the Euro overvalued or undervalued against Sterling and the US Dollar? Largely, this is going to be down to Mario Draghi, the ECB president, to determine when he speaks on Friday. Does he think that the Euro’s 10% gain against the Dollar is overdone and is likely to be a drag on inflation and thus damage exports? Damaging exports will then scale back growth in the Eurozone. If growth is scaled back then the case for not tapering QE remains. I don’t think he will hint that the Euro is too strong this week. I expect the Euro to get another shot in the arm and drive higher. Why? The Eurozone strength is now at a stage where they have to join the party the Federal Reserve started and commence scaling back the life support that QE (Quantitative easing) provided during the financial crisis. I expect a tapering of the €60B monthly bond purchases in the coming months. It is a huge balancing act for Mario Draghi and he has to get the timing right. I believe they will look at the picture and determine now is the time to act. That’s why I think the probability of Sterling/Euro hitting parity is a lot higher than perhaps the market has priced in yet.
You can view the downside moves on Sterling/Euro last week on the graph below –
I expect Euro strength to continue as briefly opined above. We have a fairly light week in terms of data with the ZEW Survey (sentiment) released on Tuesday being one of note. Other than that expect the end of the week and Draghi to drive the next move in markets.
The case for Sterling rising like the recent price of salmon? Not a strong one. Yes, the unemployment rate fell, and wages surprised by coming in at 2.1% and exports are rising due to the weakness of Sterling, However, wages aren’t rising in line with inflation and I don’t expect them to catch up anytime soon. This is going to lead to more consumers seeking credit from Banks, which is now hitting worrying levels. I expect things to get slightly worse before they improve for the UK. I expect grown up thinking to prevail and the UK and EU will end up with some form of a transition arrangement.
However, short-term I expect Sterling to suffer further.
If you have a requirement to purchase Euros from Sterling I would consider locking in some at current levels to protect yourself from further pain. Please contact the trading department or me directly for rates of exchange and levels to aim for.
As suggested a couple of weeks back I expected Cable (GBP/USD) to rally from 1.30 the figure to around 1.32 with 1.33 being toppish. I expected a retracement from these levels and so it has proved. Sterling/Dollar has continued the downside move and is now trading in the mid-1.28s. As discussed previously, I don’t see Sterling/Dollar moving hugely higher this year. If you can achieve 1.30 to purchase US Dollars I would lock in a 3-6 month forward. Please get in touch and we can structure this for you.
You can view movements on Cable (GBP/USD) on the graph below –
If you are a seller of USD back to GBP and can lock in under 1.30 start to aggregate your FX rate from that point and look to improve your rate over the coming months. You can do this by utilising market orders at certain price points. Our trading department can provide you with technical indicators and levels that will give you the best opportunity to achieve the best rate at the best possible time.
The main data of note out of the UK this week that is likely to move Sterling is the Inflation Report Hearings out on Wednesday and the second Q2 GDP estimate. If you have Sterling exposure make sure you have a strategy in place prior to Wednesday to mitigate your risk.
The US Dollar and Federal Reserve is playing second fiddle to the Euro and the ECB at present. With politics and economics more entwined than ever this can change extremely quickly.
Make sure you have had a discussion with us to implement a plan for your FX requirements.
Any questions let me know.
Have a fantastic week.
Written by Liam Alexander