Cable powered through 1.60 on Wednesday evening after Ben Bernanke surprised the markets by doing nothing, that is to say, he left interest rates on hold at 0.25% and kept the monthly asset purchases at $85 million. This was a surprise to most who were expecting the FED to start tapering their asset purchases from September which would have resulted in a bout of U.S. Dollar buying and put fear back into the markets. Instead his inaction resulted in a huge move in the stock market, causing the biggest rally since 2011. Ben Bernanke has indicated with this move that he will do whatever it takes to boost the economy and claimed the FED would do “what’s needed for the economy.” The FED are trying to do all they can to reduce unemployment by pumping the U.S. full of extra money, whether this is a sensible strategy long term only time will tell.A by-product of this new found positivity in the markets was a weakening of the Dollar across the board. GBP/USD touched 1.6150 in the early hours of Thursday morning and EUR/USD climbed to 1.3550 its highest levels since the start of February. Those with orders at 1.60 for GBP/USD were able to take advantage of the move upwards overnight Thursday.
The Cable highs unfortunately did not last too long as disappointing retail sales figures (-0.9% month on month, expectation 0.4%) out of the UK on Thursday morning weakened Sterling against its major rivals. GBP/EUR slipped back below 1.19 and GBP/USD back into the mid 1.60’s. This leaves us coming into the weekend with a mixed picture of where we might be heading into next week.
Next week is quite light in terms of data but there are a few things to look out for. Firstly on Sunday, the power brokers of Europe go to the polls as Germany holds it federal election. Angela Merkel is likely to remain in charge in coalition with another party or parties. The make-up of the coalition will be key though as early indications show that the normal CDU+CSU/FDP coalition will not gain enough votes to give them a clear win so we could end up with a situation where it becomes quite messy with 3 or possibly 4 parties combining together to form a government. Any sort of delay in the formation of a coalition or an unfavourable make-up would not be good for the Euro. However this being Germany it is likely that a practical solution will be found although in politics nothing happens quickly so it could take until early October before a bargain is agreed. Look for any Euro reaction on Monday morning if there is negative news out of Germany.
Further to the elections on Sunday the big economic data out next week is the GDP figure out of the UK on Thursday morning. The expectation is for this to be positive and over the last 2 months most of the data out of the UK has been better than expected. However that retail sales figure could be a signal of a dip in Sterling. The trend long term is for Sterling to remain strong and push upwards against both the EUR and USD but there may be an opportunity to catch a dip next week as traders may also want to secure some profit on the recent moves. If you are a buyer of GBP you may want to think about an order around Wednesday afternoon to catch any negativity if the GDP figure is disappointing on Thursday.
Enjoy your weekend.
Written by David McNeill