The Conservative leadership race took to the television studios last night with a debate that centred around Brexit. It had the feel of the TV gameshow ‘Pointless’ about it. We’ll know soon enough if the ‘contestants’ musings and posturing are any match for the main contestant that didn’t take part in the debate. Time will tell.
What does UK political upheaval create for Sterling? Uncertainty. What does that do for Sterling? Yep, it creates potential weakness for the Pound. Sterling/Dollar is now trading at the lowest levels since January.
You can view the movements on the graph below –
Whilst there has been some pressure on Sterling the main driver has been the US Dollar. The Retail Sales Control Group figure out of the US on Friday rose by 0.5% (consumers spent more than expected in May). In addition, GDP growth forecasts are being revised higher. This all points to a continuation of a stronger dollar for the foreseeable future. The main event this week is the Federal Reserve meeting on Wednesday. Will they or won’t they cut interest rates? Probably neither is the answer. The US has had some mixed data recently with the jobs report posting a meagre gain of 75K. The market is pricing in two interest rate cuts this year. Should the Fed communicate a scaling back to one or perhaps no rate cuts this year then the US Dollar will push even higher. Couple this with an embattled Sterling for the rest of the summer and we could open up a move below 1.25 the figure on Sterling/Dollar. Of course, should the Fed indicate that two rate cuts are still on the cards then expect the Dollar to come off slightly. Fed Chairman Powell may also discuss and share their thoughts around inflation/jobs/global growth/trade wars (potentially).
If you hold USD I would consider a SPOT trade at current levels and lock in the recent gains. You are at fantastic levels. I do believe Sterling/Dollar has another move lower in it although this may not come to fruition. Lock in some of your exposure on SPOT and then implement some take profit orders around 1.26 and below. You can contact the trading department directly to implement these trades and discuss specific technical levels to execute at.
If you need to purchase USD from Sterling it is a case of sitting tight for now. How long sitting tight means though is open to debate. I don’t see a huge amount of upside on Sterling/Dollar unless a turn in sentiment on the dollar occurs this week. It may well be October time before any meaningful change for Sterling transpires. I expect Sterling to be on the ropes over the summer months. If you need to purchase Dollars this month I would look at doing some now as we may drop further. Again, please contact the trading department to discuss specific levels.
We have a heavy week of data and commentary this week so the levels around the majors may move significantly. Sterling/Euro has been trading around the 1.12-1.13 level for a while now and we may move out of this tight trading range this week.
You can view the recent movements on the graph below –
Where now for Sterling/Euro? I think there’s still room to run to the downside and I’m neutral to negative on GBP/EUR. I think we’ll break through 1.12 the figure in upcoming trade and there is a chance we could sustain this move lower. This week we have the ECB President, Mario Draghi, speaking in addition to an economic sentiment survey (ZEW) released from Germany tomorrow. From a UK perspective we have the Bank of England Governor, Mark Carney, speaking on Tuesday with the BOE interest rate decision and minutes released on Thursday. I expect this to be a non-event. Sandwiched in between this on Wednesday we have inflation data released from the UK in the form of CPI (YoY) (May) released with a print of 2% expected, down slightly from previous 2.1%.
If you hold EUR and need to move into Sterling do take some risk off the table and lock in some of your exposure on a SPOT basis. In addition, stagger some orders to the downside to take advantage of any intraday moves in your favour.
If you are purchasing Euro’s there may be some opportunities around Draghi’s speeches and any weak data out of the Eurozone to see some spikes higher. Please discuss your specific requirements with the trading department whom will be on hand to answer any questions you may have.
Have a fantastic week.
Written by Liam Alexander