The beach towels have been put away for another year. Out of office messages will be switched off and the summer lull of inactivity will come to a close. This should mean we’ll have some volatility return to the currency markets with traders/investors back at their desks and liquidity returning to the market. Range bound activity was becoming very dull to say the least.Let us start off with Sterling’s dear old nemesis the Euro. I believe that the dynamics of the Euro have fundamentally changed.

I think the ECB and Draghi now want the EUR weaker and I believe you will hear comments from various central bank officials ‘talking down’ the single currency over the next few months. Isn’t it funny when a central bank wants a currency weaker that these statements/utterances are played out to the media? Perhaps I’m too cynical and all these things are simply a coincidence.

If you look at Draghi’s August Press conference he stated “fundamentals for a weaker exchange rate are today much better than they were two or three months ago”. I’d suggest a weaker Euro isn’t too far off and I’d suggest it will be significantly weaker in 6 months’ time.

What does that mean for GBP/EUR over the remainder of the year? It is an opportunity, if you have a GBP/EUR exposure, to secure the remainder at advantageous levels. I would place market orders and stagger them at various levels so you ‘average up’ your rate along the way. This is a more risk averse strategy whilst still providing you with the upside to improve your exchange rate. By all means you can place an order at say 1.28 however what if it doesn’t get there? You are best off staggering ‘X’ amount of your exposure at levels up to 1.28 and then closing off more when we reach that level. The phrase “don’t have all your eggs in one basket” applies here.

So what of GBP/USD? Well, I said at the beginning of the year that I thought GBP/USD would be around, if not under, 1.60 by the end of 2014. I don’t see much evidence to make me change my view so I will maintain 1.60 as my 12 month forecast. We’ve dropped into the 1.65s recently which is quite a shift in the past few weeks from where we were. I expect the US Dollar to continue its recent bullish moves against both Sterling and also the Euro. I believe the cable move (GBP/USD) will be less pronounced than the EUR/USD move. The simple reason being that I believe US data will continue its cyclical outperformance against its G10 counterparts. In addition, the UK and US have strong growth trajectory whilst Europe, to me, are much like Manchester United at present. They have the tools to get themselves out of this mess however the longer it continues to meander along the less likely a suitable conclusion will be reached.

I feel we’ve had the UK push in recent months and so therefore Sterling upside will be limited against the Dollar while I expect further strong data to come out of the US hence sticking to my original forecast. If you are a USD buyer from GBP I would suggest covering off some of your exposure on either a Spot or Market order basis as I believe the rate will only get worse for you. This is of course my opinion and it is ultimately your commercial decision when and how to execute your transactions. If you are a USD seller, then you may have some better exchange rates coming your way over the next 3 months. As I always suggest mix being risk averse whilst allowing some upside potential. Place market orders on USD/GBP at various levels. Please contact myself directly or one of the team to implement these.

The ECB policy meeting on Thursday will be the main focus of the markets attention this week along with the NFP figure from the US on Friday (Non-Farm payroll). As usual the MPC meeting will be a damp squib. August data will be roughly in line with expectations and we’ll see Sterling remain relatively comfortable although upside will be limited, especially on GBP/USD.

The NFP figure will provide some volatility on Friday on USD pairs so if you have an exposure then you may wish to consider having a strategy in place.

If you have any questions please contact myself directly or one of the team.

Have a great week.

Written by Liam Alexander