ACM Update Tuesday 28th January 2020

Sterling briefly soared higher at the beginning of last week like the Hawaiian rock climbing goby fish. Will the Bank of England meeting on Thursday provide a kick upwards for Sterling or will an interest rate cut take the wind out of its sails?

Over the past few trading sessions Sterling/Dollar (Cable) has been trending to the downside after hitting highs around 1.3150 last week. We had a spike higher at the beginning of last week when PMI’s surprised to the upside.

You can view the movements on GBP/USD over the past week on the graph below

This week we have event risk for GBP/USD with the Federal Reserve interest rate decision (expected to be held at 1.75%) followed by the FOMC Press Conference. I don’t expect anything out the ordinary from the press conference and I expect rates to be kept on hold. Dollar movement should be limited. The main mover for Sterling this week will of course be the Bank of England meeting. We have the Bank of England Quarterly inflation report, BoE Interest rate decision and the Bank of England’s Governor Mark Carney speaking.

Where will Sterling end the week against the Dollar? Chances of a rate cut have cooled slightly with PMI figures last week coming in at 52.4 (anything above 50 represents growth). It is around 50/50 on whether there is a rate cut or not this week, down from around a 65% probability beginning of last week. If we see a 25bps cut then expect Sterling to come under pressure and push to the downside. Conversely, if rates are kept on hold expect Sterling to rally higher.

If you hold US Dollars consider a SPOT transaction before Thursday. This gives you a price point to work from. In addition, implement a take profit order to the downside on USD/GBP. Should we see a rate cut then we’ll see a retracement lower. Please contact the trading department for a SPOT price and to discuss technical levels to aim for on the downside.

If you need to purchase USD from Sterling, cover off some on SPOT prior to Thursday. This will give you some protection should a rate cut materialise. If we see rates on hold then Sterling/Dollar should push higher and break last week’s high around 1.3150. Again, please contact the trading department whom will be able to provide guidance on expected levels.

On Sterling/Euro you can view the movements on the graph below

This morning we had the release of the German IFO Business climate index that came in under expectations at 95.9. This pushed EUR/USD to fresh annual lows around the 1.1020 region. We could see EUR/USD push below 1.10 the figure. This in turn should give Sterling/Euro a nudge higher. If you need to purchase Euro’s from Sterling consider a SPOT trade at current levels. If you can achieve around 1.18 to purchase Euro’s it may be prudent to lock in some of your exposure. We can then look to the upside and implement a series of take profit orders around 1.19 and 1.20 the figure to capture any further upside. Please contact the trading department for a rate of exchange and to implement some orders.

On January 31st the UK formally leaves the EU. As this year progresses expect Sterling/Euro to ebb and flow on post Brexit talks. As I’ve said previously I do expect Sterling higher end of year against both the US Dollar and Euro. However, short-term Sterling is open to downside risk. If you can achieve 1.18 I would suggest this is good value at present. If we trade back around 1.20 then consider locking in a sizeable portion of your EUR on a Forward Contract. Again, please discuss Forward rates and margin requirements with the trading department.

We are fairly light on European data this week. We have some preliminary figures released from the Eurozone in the form of CPI (YoY) (Jan) and GDP (YoY) (Q4) with prints of 1.4% and 1.1% expected respectively. Sterling/Euro this week will largely be dictated by UK news flow and the Bank of England meeting.

If you have any questions around your currency requirements please get in touch with the Aston trading department.

Have a fantastic week

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.