Last week was rather dull in FX markets with range trading prevalent. Indeed, the majors started trading roughly at the same opening levels of a week ago. This week should prove more interesting with increased volatility due to a number of key economic releases. I believe this will be the week where we’ll see the start of renewed US Dollar strength and a sustained change in direction on both EUR/USD and GBP/USD. Wednesday is a key day for the dollar along with Friday and the release of the NFP figure (Non-Farm payrolls). On Wednesday we have the Fed interest rate decision, monetary policy statement and an expected further reduction of 10 Billion in QE. This coupled with an expected fall in unemployment to 6.6% will provide us with dollar strength. The US Dollar, in my opinion, is undervalued at the moment and as stated at the beginning of the year I think Q2 onwards will see a change of direction. GBP/USD is looking very toppish to me and we’ve traded up at these levels previously and we did of course see a retracement back to the 1.63s. I would be extremely surprised if we hit 1.70 on Cable. If you have a GBP/USD exposure you could look at a 40/40/20 strategy. Look at 40% of your exposure on a Forward Contract basis to secure your rate at these elevated levels on a 3/6 month basis. 40% on a Spot basis and should you think there is still some upside on GBP/USD you could look at placing a market order at 1.69 or 1.70 on the remaining 20%. As suggested above, I don’t think we’ll hit 1.70 however ultimately it is your decision. Personally, I would suggest securing 50% on a Forward Contract basis and 40% on Spot and leave a remaining 10% on a market order basis. Please contact myself or one of the trading team to discuss.Sterling has proved robust this year with a relatively steady direction to the upside. It does however continue to run out of steam around 1.21-1.22 on GBP/EUR. I would look at placing market orders at 1.2150. With GDP (YoY) and MoM) (Q1) released tomorrow at 09.30am (UK time) we may see some volatility on the release that may give Sterling the impetus to push higher. The consensus is for figures of 3.2% and 0.9%. Contact myself or one of the trading team to implement a market order at 1.2150 today to try and secure this rate over the coming days.
Any positivity out of the UK may however be tempered by releases/news out of the Eurozone this week. We have CPI (YoY) and (MoM) (Apr) out of Germany tomorrow with retail sales and unemployment data following on Wednesday. Should the figures out of Germany be strong then we may see a further boost to the single currency. We also have CPI data out of the Eurozone as a whole on Wednesday that will give us a good indication as to where we are.
I expect GBP/USD to drop by around 1% this week so it may be wise to look at securing, should you have the capacity, Q2 or even further out into Q3 at these levels. As I have said many times before anything above 1.60 is still considered ‘fair value’.
On GBP/EUR I would look at securing on a Spot basis with a market order staggered at 1.2150.
Should you have any questions please do let me know.
Have a good week.
Written by Liam Alexander