Sterling has crashed into rocks like the ship in Shakespeare’s Twelfth Night. Will the themes of confusion and tragic comedy apply to Sterling for the rest of the year? Or will Sterling get a performance enhancing ‘boost’ like Justin Gatlin has had over the years?
I forecasted Sterling/Euro being under 1.10 by the end of August. I don’t see anything over the coming weeks to change my forecast. Indeed, we may get there sooner than the end of the month. The move in GBP/EUR has largely been down to Euro strength. However, I think we’re due a bout of Sterling weakness that will likely drag the pair lower. If the EUR/USD pair can consolidate above 1.18 the figure and indeed break through 1.19 with a rally to the psychological level of 1.20 then we’ll see GBP/EUR under 1.10 sooner than the end of August.
You can view the movements on Sterling/Euro last week on the graph below –
Why do I think Sterling is going to be on the ropes? I can’t answer this question without mentioning ‘Brexit’. I think it is fairly obvious to everyone by now that ‘Brexit’ is causing economic uncertainty. I think we can park the ‘Brexit’ conversation until October where I see this becoming front and centre again. We have the Conservative Party conference on the 1st of October with Brexit negotiations on the 9th October. Until then markets will be focusing more on economic fundamentals.
Tomorrow is a decade since the start of the financial crisis. Is the UK walking into another one? I don’t believe so. However, there are a few warning signs that may weigh on Sterling. Wage growth is stagnant and going backwards. On Wednesday we have UK inflation Report Hearings out of the UK. What is likely to be reported? As discussed earlier in the year I expect UK inflation to hit 3% this year. A full percentage point above the target rate. This translates to the man in the street having less money in his pocket whilst wages aren’t going anywhere. With costs rising more people are borrowing. Consumer debt is climbing higher with the amount of people paying for things on credit increasing. Indeed, the ratings agency Moody’s downgraded a large portion of UK Consumer debt last week.
To add to the aforementioned points we had a relatively lacklustre Bank of England meeting. As expected rates were left at 0.25% and the bond buying program remained at £435 billion. Growth forecasts were revised lower with the UK sluggishly crawling along. Growth is expected at 1.7% this year. I expect this to be revised lower still. Do I see any upside for Sterling this month? Nope. The only move higher likely on GBP/EUR will be down to a scale back of market long positions on the single currency. There are no real events this month with most investors and traders sitting on a beach sipping Pina coladas or Strawberry Daquiri’s.
If you are a EUR buyer from Sterling consider locking in some of your exposure. If you can stay above 1.10 over the summer months I would consider this a good level to achieve. Should GBP/EUR be higher than it is currently trading at? Absolutely. However, the Single Currency is currently the darling of the market so until we see her elbowed out of the picture then pressure is going to remain to the downside. Please contact me or the trading department for a rate of exchange.
If you are converting Euro’s back into Sterling lock in the majority of your exposure at these levels. Don’t get greedy. I do believe we will go below 1.10 although due to the lack of grown ups in charge around the world anything can happen. Take advantage of the moves. On your remaining amount of exposure consider implementing market orders. Contact the trading department to discuss appropriate levels to aim for.
Where are we going? We dropped off from levels above 1.32 after the release of the NFP (Non-Farm Payroll) figure. We’re trading above 1.30 without any clear direction either way at present.
You can view the movements on Sterling/Dollar last week on the graph below –
Non-Farm Payrolls came in above expectations at 209K against consensus estimates of 183K. The jobless rate fell to 4.3%. Cable (GBP/USD) fell to 5 day lows around 1.3090 on the release. Politics will continue to weigh on dollar sentiment due to the inability to get anything going from a Fiscal point of view.
Will the US raise rates this year? Will they start to reduce the Balance sheet? I’m largely Dollar neutral at present with a slight bias to the downside. I expect Cable (GBP/USD) to hang around the 1.30 level short-term. For Sterling/Dollar to drop below 1.30 the figure it will be Sterling weakness that drags it lower.
As discussed a few weeks ago, Sterling/Dollar is toppish around 1.33. We’ve challenged the mid-1.32s and we’ve now moved lower. If you are USD buyer from GBP lock in above 1.30 if you can. I don’t see Sterling/Dollar moving much higher in 2017.
If you hold USD and need to convert back to Sterling consider placing market orders at 1.30 the figure as the first point of resistance. Please do get in touch with our Trading department to discuss specific technical levels that need to be broken. They can then provide you with guidance on exact market levels to aim for over the coming weeks.
If you have any questions on any of the above please do let me know.
Have a fantastic week.
Written by Liam Alexander