ACM Update Monday 20th January 2020

We’ve had Christmas Eve. Next up is Brexit Eve. Will the Bank of England’s MPC (Monetary Policy Committee) cut interest rates on January 30th, the day before we formally leave the EU? The odds for a rate cut are currently around 65%.

The UK had inflation data released that fell to a three year low in December. In addition, we’ve had dovish comments from policymakers in recent weeks. Employment data out this week in the form of the ILO Unemployment rate (3M) (Nov) should give us greater clarity. Expectations are for a print of 3.8%. Other than this release there isn’t too much data of note out of the UK prior to the Bank of England meeting on 30th January.

What will happen to Sterling if the Bank of England cut interest rates? Akin to Wile E. Coyote from the Acme Road Runner cartoon, Sterling will fall off a cliff (You’ll need to be of a certain vintage to remember that one). Where could Sterling go if we cut rates prior to exiting the EU formally? Over the past few trading sessions on Sterling/Dollar we have failed to hold above 1.30 the figure. We’ve challenged up to 1.31 although those gains have been short-lived. We’re currently trading around the high 1.29's. You can view the recent movements on Sterling/Dollar (Cable) on the graph below –

If interest rates are cut then expect Sterling to trade back in the 1.27's/1.28's. If you hold US Dollars and there is a downside move prior to the end of the month, consider implementing a SPOT trade if you can achieve under 1.30. Further to this, implement some take profit orders to the downside to try and take advantage of any sharp moves on the 30th January. Please contact either the trading department or myself directly to discuss your upcoming requirements and technical levels that may be achieved.

If we do have a dip lower it may be prudent to lock in some Sterling from USD and also EUR on a forward contract out for 3/6 months. This will give you certainty on your FX rate over the initial UK/EU Brexit transition period. Whist I don’t expect trade talks to impact Sterling too much in Q1/beginning of Q2 it will play more of a role the closer we get to the end of the year. Please contact the trading department to discuss structuring a Forward trade and margin requirements.

In terms of Sterling/Euro, we are still flirting with 1.17. You can view the recent movements on the graph below -

We haven’t had a sustained break higher and regaining the level of 1.20 after the General Election seems an arduous climb at present. In terms of the next move for GBP/EUR I expect us to trade slightly lower. Should there be a bounce for the UK I don’t expect this to come into play until after the UK budget end of March. I do expect Sterling higher end of year although ultimately trade talks will play a part in addition to the UK economy getting out of second gear.

In terms of data this week that may impact EUR we have the release of the German ZEW survey (Jan) that measures economic sentiment. In addition, on Thursday, we have the ECB interest rate decision followed by the monetary policy statement and press conference. The ECB meeting should prove rather uneventful although we should receive more guidance on inflation and growth prospects.

If you have any requirements to purchase EUR from GBP please contact the trading department directly for a rate of exchange. The end of the month may prove eventful for Sterling so please discuss a strategy with the team at Aston to mitigate your currency risk.

 If you have any questions please do let me know.

 

Have a fantastic week.

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.