The Euro still has the wind in its sail. Sterling does not. Viewing the Sterling/Euro rate at present is painful. It is as painful as being kidnapped and made to sit in a room, watching endless episodes of Love Island, with people that fill their sentences with ‘like’ ‘literally’ and ‘basically’. Will GBP/EUR break through the psychological level to the downside of 1.10 the figure? We will see.
You can view the moves last week on GBP/EUR on the graph below –
Sterling had its worst week against the single currency in nine months. Over a 2% move lower. This has largely been driven by Euro strength and thoughts that the ECB (European Central Bank) would tighten monetary policy next year. UK inflation figures also didn’t help Sterling’s cause. The release came in at 2.6% instead of the consensus estimate of 2.9% last week. This led to Sterling being sold off with the chances of a rate hike from the Bank of England looking less likely this year.
Is the Euro overbought at current levels or will we see further pressure on Sterling/Euro over the summer months? As mentioned in previous articles I am Sterling negative over the summer. The past week has done little to change my view. We may see Sterling/Euro climb a little and settle back in the 1.12-1.15 range for a while although I expect a move under 1.10 by end of August. If you have a requirement to purchase Euro’s from Sterling please do consider locking in some above 1.10. Sterling/Euro has rallied slightly this morning on the back of poor German manufacturing data. I think this will be the exception rather than the rule over the coming months. If you would like a SPOT rate please get in touch with the trading department.
Last week Mario Draghi, the ECB President, gave his press conference. Despite his dovish tone and the bond buying program remaining capped at €60 Billion and no change to interest rates investors bought the Euro. Why? The market is taking his comments with a pinch of salt. The Eurozone recovery will continue. I expect a scale back in Bond purchases from early next year even if publicly they say this hasn’t been discussed. This will likely be announced once we get the summer out the way and the word ‘tapering’ comes back into fashion at the September meeting.
If you’re a EUR seller consider covering off a sizeable amount of your requirement back to Sterling on a SPOT basis. Again, contact the Trading department or me directly for a rate of exchange. As detailed above I see further pressure on GBP/EUR in the next 3 months. It may be worth considering market orders over the next few months. If you would like to discuss appropriate levels to target let me know.
On the surface Sterling/Dollar looks to be holding up rather well right? Wrong. The Market views the dollar as fundamentally bearish with it being sold off heavily against the Euro for example. We’re trading above 1.1650 on EUR/USD. With Fiscal stimulus looking more and more of a challenge for the yellow haired red tie wearing chap in the White House the Dollar has been sold off. In addition, the resignation of a key spokesman further intensified political upheaval for the US Government.
So, with all this going on and mixed data from the US Cable (GBP/USD) should be trading a lot higher. The fact Cable (GBP/USD) is trading marginally lower against the US Dollar says it all really. Sterling is not performing well. We may see a short-term bounce higher back to the 1.31-1.33 range although I then expect a number of short positions to come in with Sterling/Dollar taking a Tom Daley inspired dive off the top board.
You can view the trend lower last week in GBP/USD on the graph below –
If you are a USD buyer from GBP lock in some above 1.30. This is going to be the upper end of the range for 2017. Please contact the trading department for a SPOT rate. We may see some spikes higher on an intraday basis so we can look to structure market orders on a GTC (Good till cancelled) basis for you. If you would like to discuss levels to aim for please let me know.
What do we have out this week? From the UK we have Q2 growth figures out and also the inflation report hearings. These are due out Wednesday morning. The IMF (International Monetary Fund) has lowered UK Growth forecasts (as well as the US) so will we see a dip in figures on Wednesday? There will be Sterling volatility around these releases so make sure you have something in place to either protect yourself from movements against you or to take advantage of any moves in your favour. Adding fuel to the fire on Wednesday will be the Federal Reserve interest rate decision and policy statement. Do I expect a rate rise? Chances are practically nil. Inflation in the US is falling so will this have an effect on the Federal Reserve sending signals on the expect one more rate hike penciled in for this year? Possibly. There may be Dollar movement around this event.
There are slightly thinner markets over the summer with less liquidity so any moves can prove more dramatic than normal. Please make sure you have a plan in place for the remainder of July and into August.
Have a fantastic week and enjoy the rain soaked London summer.
Written by Liam Alexander