We are firmly in the throes of ‘dry January’ with people drinking Kombucha tea for no apparent reason at all. I’m sure it’ll counterbalance those doughnuts come February. Last week was rather dull in currency markets with low volatility present across the majority of currencies. This week, things should start to get more interesting with market participants back from holidays.

GBP/USD

Where are we likely to trade this year on Cable (Sterling/Dollar)? As always, forecasts are as wide as the Grand Canyon. Some analysts are calling Cable at 1.50 whilst others see GBP/USD trading under 1.30. Whilst I think the US Dollar will come under some pressure this year Sterling will have a large say in the direction of Cable (GBP/USD).

We have settled above 1.35 the figure in recent trade. You can view the recent price movements on the graph below –

GBPUSD 08-01-2018.png

Progress in Brexit talks and expectations for further interest rate rises from the Bank of England this year has shifted GBP higher against the Dollar. Will this trend continue? Short-term, yes. The Dollar was down at the end of 2017 and although it has clawed back some ground early 2018 it isn’t anything substantial. We had Non-Farm payrolls released on Friday with 148K jobs added. This figure was under expectations. The US will find payroll expansion more challenging this year with full employment in the US labor market becoming closer and the unemployment rate unchanged at a 17 year low of 4.1%. This should push wage growth higher in the US. How many interest rate rises will we have in the US this year? Will US tax reform have a significant impact on economic growth? How will President Trump shape US politics this year? We will have a clearer idea once the markets get into gear in the coming weeks. That will shape either a Dollar positive or negative view.

Whilst I think GBP/USD will push higher short-term if you hold GBP and need to purchase US Dollars I would look at locking in recent gains. If you can achieve around 1.34/1/35 on GBP/USD I would consider this good value from where we have been trading. Please contact the trading department for a current SPOT or Forward rate. We are experiencing low volatility at present so any spikes in Cable (GBP/USD) are likely to be limited so consider a SPOT transaction for now rather than implementing a market order. Should EUR/USD regain the 1.20 handle then this may drag GBP/USD higher.

If you hold USD and need to convert to GBP you need to weigh up the risks of a negative Dollar move. Might we come off recent highs from around 1.35 and retrace the move back down? Possibly. However, the uptrend looks set to continue so it may be prudent to cover off some of your Dollar exposure back to Sterling at current levels. Please contact the trading department for a rate of exchange. As we always say, doing nothing is speculating. Give yourself a price point to work from.

GBP/EUR

The great enigma. Where is GBP/EUR going to trade this year? I’ve been negative GBP/EUR for a long time and I don’t see anything to change this view Q1’18. Q2 onwards, GBP/EUR should start to push higher.

You can view the recent price movements on the graph below -

 

Sterling/Euro has been trading in a tight range the last few weeks, as expected. Will we start trading out of this inactivity? I don’t see any wild swings in either direction for Q1. UK consumer spending is slowing, inflation is high and real wages are falling so this may prove a drag on GBP. UK politics will of course play a major role in the direction of Sterling. A cabinet reshuffle is expected to take place shortly. Will the UK get a ‘transition’ deal with the EU? The EU summit in March is looking a key month for the UK Government. If we get a transition deal then this should send the Pound higher. If we don’t, then expect GBP/EUR to trade under 1.10 the figure in Q2. Will the ECB end its stimulus program this year? The Eurozone is out the woods of deflation and whilst it probably won’t reach its target rate of 2% I think policymakers will be flexible on that front. EUR/USD broke through the 1.20 level and I expect the Euro to push higher against the Dollar Q1 this year.

If you hold Euro’s consider converting a sizeable portion of exposure back to GBP at current levels. You then have a rate to work from for 2018. Please contact the trading department for a current rate of exchange. I expect the rate, should we get a transition deal and a ‘soft’ Brexit to be significantly higher by the end of 2018. Take some of your risk off the table at current levels.

If you are buying Euro’s from GBP I would implement a series of market orders to take advantage of any moves to the upside. Please contact the trading department to structure these at appropriate levels. The trading team will be able to provide you with key technical levels to aim for.

This week, the data calendar is relatively light. The main release for the Dollar is Retail Sales (Dec) on Friday in addition to CPI (YoY) (Dec). The main releases that should impact the Euro are Unemployment figures, Retail Sales and industrial production figures. UK wise, there is nothing of note other than

Industrial and Manufacturing figures released on Wednesday.

If you are back at your desk today from the festive break and haven’t considered your FX strategy for the year ahead drop me a note.

Have a fantastic 2018 and any questions please let me know.

Written by Liam Alexander