Hate to say I told you so, but I told you so. GBP/USD is continuing its downtrend and my original 12 month forecast of it being under 1.60 by end of 2014 has come to fruition. Sooner than expected, granted. For those of you that read my report on a weekly basis; before it hit 1.60 I revised my view to 1.55 in the next few months. I see no stem to the tide and the downwards trajectory of cable. Sterling had its biggest weekly drop against the dollar last week in almost 15 months due to worsening manufacturing figures and declining house prices. I would however temper the doom and gloom and suggest that the robust and good news out of the UK has dissipated somewhat that propelled Sterling higher however I think we’re in for a period of consolidation rather than any significant shift lower. I don’t think Sterling will come under intense pressure. Why? We’re back to the ugly parade. Who is better looking out of the Euro/Sterling and US Dollar? I believe we’ll be in for a stable Pound, a weakening Euro and a strengthening US Dollar in the last few months of 2014. What does that mean for you? If you’re a US Dollar buyer then I would suggest looking at your costed levels for the remainder of the year and into Q1 ’15. The 1.60 handle has given way in recent trade and that was a major psychological support level. Will the move gather momentum or will there be a bounce back over 1.60? I expect there to be slight shift higher in intraday trading however I don’t expect the bullish momentum to hold. It will be a fleeting move higher. The US Dollar is a firm favourite of the currency markets at the moment. Indeed, the NFP (Non-farm payroll) figure released on Friday showed the US economy added more workers than forecast last month. In addition, the unemployment rate dropped to the lowest since 2008. The dollar gained against all of its 16 major counterparts. With the Fed (Federal Reserve) looking likely to hike rates prior to the ECB (European Central Bank) then the Dollar is going to strengthen faster than the single currency and in turn EUR/USD is going to move lower. Should that occur (and it will) then GBP/USD is going to be dragged lower and in turn GBP/EUR is going to push higher.
If you’re a USD buyer and haven’t covered off your exposure for the remainder of the year it may be worthwhile considering doing so. I would look at a 60/30/10 ratio. 60% on Forward contracts to mitigate your currency risk entirely, 30% on Spot, and should you think there is any upside in cable work 10% on a market order basis. My view, and it’s entirely my view, is that upside will be limited. Ultimately, it is your decision in how to manage your exposure. Please contact myself or one of the trading team to discuss.
GBP/EUR? We’ve had a consolidative move lower since Sterling finally asked the Euro out for a date and moved things along. Indeed, we’ve reached two year highs in the last few weeks. As always, Sterling is a shrinking violet so we’re back to square one and range bound trading after an initial flurry of butterflies. I would suggest that we’ll see a telling move higher in the coming month with Draghi and other ECB officials talking down the single currency to stimulate growth in the Eurozone. If you’re a EUR buyer stagger market orders to average up your yearly level. I would suggest 1.28/1.2850/1.29 and on an outside chance 1.30. I would implement these orders as I do think we’ll see a spike higher. Send myself or one of the team an email and we can look at appropriate levels and amounts for you.
What do we have out this week in terms of data? As the winter sets in and the contemplation of scarves enter our minds Monday and Tuesday is pretty non-existent on the data front. Wednesday however the focus shifts to our friends across the pond with the release of the FOMC minutes. Sadly, that is about the only data event of note. We have the Bank of England Interest rate decision out on Thursday which is a non-event these days so we’ll be looking at commentary this week rather than hard data.
Levels I will suggest this week that may be of interest to those that want to place market orders –
Selling USD/GBP – 1.59
Buying GBP/EUR – 1.28/1.2850.
If you have any questions or comments please let me know.
Have a good week.
Written by Liam Alexander