ACM Update Monday 18th May 2020

The wheels of the UK economy are slowly starting to turn. There are glimmers of hope that we’re starting to emerge from the worst of coronavirus. However, that six letter word is going be back in the news shortly – Brexit.

Sterling was under pressure last week and short-term this will continue. You can view the movements on Sterling/Euro in the graph below -

 

The longer there is no extension agreed to talks with the EU then the larger the chance that the UK leaves with ‘no deal’. This, inevitably, concerns the markets. Sterling will struggle to sail dramatically higher this year. We will see bouts of GBP strength although any significant shift higher, in my opinion, can be ruled out. How and when the UK fully emerges from coronavirus is still to be determined. Negative interest rates in the UK could come to pass to reduce borrowing costs and to combat any potential deflation. This would likely boost exports and of course push Sterling lower still. However, quite honestly, no-one knows how things are going to play out. There are too many variables at present. The fact Gold is priced at a 7 and a half year high with further gains expected shows the concerns from investors.

If you have requirements to move EUR into GBP consider taking advantage of the recent move in your favour. Please contact a member of the trading department whom will be happy to assist with a SPOT price. If you have a slightly longer time horizon consider implementing take profit orders to the downside to take advantage of any intra-day moves. Our trading team can discuss technical levels with you.

If you need to purchase EUR consider putting a line in the sand around current levels. We might drift back below 1.10 the figure so whilst rates are far from attractive at present they could look a lot uglier in the coming weeks. Data out this week from the UK is the ILO Unemployment Rate (3M)(Mar). We expect a print of 4.4% against a previous figure of 4%. A rise in unemployment is expected and this number will start to look a lot worse towards the end of the summer. We also have inflation data released in the form of CPI (YoY) (Apr). We expect a move lower from the previous 1.5% to 0.9%. This may impact Sterling on the release to the downside. On Friday we have UK Retail Sales (MoM) (Apr) released. This number is not going to be pretty as footfall has disappeared. We expect a print of -16% against a previous print of -5.1%. Sterling will do well to hold its position this week against both the Dollar and the Euro.

You can view movements in Cable (Sterling/Dollar) in the graph below –

If you are selling US Dollar into GBP take advantage of the recent moves with a SPOT transaction. We’re now trading at fantastic levels. If you would like a rate of exchange please get in touch with the trading department. If you’re buying USD from GBP look to implement take profit orders to the upside. Whilst the move higher won’t be significant there may a slight rebound. Again, please get in touch with the trading department to run through your particular requirements. In terms of data out from across the pond this week we are relatively light. However, we do have the FOMC minutes released on Wednesday which will give us further guidance on interest rate policy and economic growth, or lack of it. We also have initial jobless claims data released. Again, this isn’t going to be pretty reading. This could weigh on the dollar.

We also have the Federal Reserve Chairman Jerome Powell speaking on Thursday. He is likely to say that the economic recovery in the US will stretch towards the end of 2021 and be a long drawn out process. Any commentary around negative rates will be closely watched.

Currency markets will continue to swing wildly for the remainder of 2020. These truly are unprecedented times. Please make sure you have a robust plan in place around your FX strategy to weather any further headwinds that may present themselves in the coming months.

If you have any questions or would like a member of the Aston team to get in touch please let me know directly.

Enjoy the sunny weather this week!

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.