- Continued political uncertainty regarding Brexit
- UK’s procurement cycle distorted by stockpiling ahead of the missed (April) Brexit deadline
- US Fed and ECB are both giving signs of relaxing their interest rate policy
- Analysts are forecasting sterling to show further long term weakness
- Sterling is catching its breath before its next move
- BoE Governor Carney due to give his quarterly inflation report
For those longing for the beach, the news is that unfortunately the summer doldrums are yet to hit the Forex markets.
This morning’s relatively low volatility in the GBP currency markets probably marks that the currency is waiting for its next move rather than entering side-ways summer markets. On Tuesday, sterling recorded its monthly high against the dollar ($1.2784). It hadn’t reached these levels since mid-May, but then quickly fell away through the rest of the day’s trading period. Now trading at $1.26782 it’s to some extent treading water and offering an opportunity to digest some of the factors in play.
The above chart shows GBP and USD over a four year period. Taking the trading channel to be between $1.44 and $1.19, it’s clear to see at current levels, there is an opportunity for price to move in either direction and remain within the trading range.
The TradingView technical charts (setting: 1 day) offer ammunition to the bears:
Any short position would have room to breathe before encountering the first Support Level. The Pivot and R1 look like reasonable places to set a stop loss.
The recent intraday high of $1.2784 signified an attempt to move above $1.2720 and $1.2760 resistance levels – the subsequent fall back to $1.2685 marking the inability to do so. With support in the 1.2640 – 1.2650 region (including the 200-hour Simple Moving Average) it will be interesting to see how long cable takes to decide its next move.
Central bankers have been happily sharing a range of comments regarding the economic outlook. Some of the news emanating out of the US Fed appears somewhat uncoordinated. But not all the blame for this confusion sits with the committee. At the most recent meeting, the vote to keep rates the same was passed by 9-1. The market itself appears to have gotten ahead of itself with the idea that a 50 basis point cut is on the cards. Particularly as the S&P 500 last week posted a record high of 2,954.18.
On Tuesday, Federal Reserve Chairman Jerome Powell and St. Louis Fed President James Bullard offered comments to suggest the central bank is moving away from the idea of delivering a half-point interest-rate cut in July.
At a meeting in New York, Powell said:
“The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation.”
Bullard, a dove for longer said on Bloomberg Television:
“I think 50 basis points would be overdone.”
As and when the market prices in this tighter monetary policy, it will offer the dollar further support against all currencies including sterling.
The European Central Bank (ECB) has a more consistent line of commentary, but the greater problem is that it wants to cut rates that are already negative. With deposits at the ECB at negative 0.5%, those with deposits are being charged a fee for that privilege. The move into an environment of long term negative interest rates raises a lot of questions. The analysis by J. Eisenschmidt (ECB) and F. Smets (ECB)adds some historical context to the situation (see this version of their analysis from 2018: https://cepr.org/sites/default/files/40021%20Eisenschmidt%20Smets%202017%20March%202018.pdf).
The higher level summary by Brian Blackstone (writing in the Wall Street Journal) flags up the key issues arising:
Looking through the rear-view mirror and considering the recently released economic data reports allows a more quantitative approach to be taken. The UK CBI reported on Tuesday that UK retail sales fell in June at the fastest rate in 10 years. Whilst the deterioration of the high street is much reported, the rate of the decline could be significant given that the UK economy is so dependent on consumer spending. The CBI did provide some mitigating factors that could part-explain the situation but as Catherine Shuttleworth (CEO of marketing agency Savvy) said:
“The announcement from the CBI this lunchtime – that retail sales have plummeted – will be no surprise to many shoppers who have pulled in their belts. The continued fall in consumer confidence is impacting retailers outside of critical categories like food and drink… this summer’s gloomy weather, gloomy attitude towards Brexit and general malaise is certainly slowing our spending right up.”
As if the vacillating comments from central bankers weren’t enough to contend with, the UK has added to the mix the Conservative party leadership contest. Two politicians vying to be leader of their party, and effectively Prime Minister, are literally going to be standing at hustings for the next few weeks. It sometimes pays to be cynical and suggest both candidates will do and say whatever is needed to gain election. With the process being so protracted, there is a lot of scope for them to raise the temperature of the debate in an effort to secure the premiership. When candidate Boris Johnson said on Tuesday that the UK would leave the EU on 31stOctober “do or die”, was that a line previously considered or one that just came to mind? The identity of the new party leader won’t be declared until Monday 22ndJuly, so there is a long time for traders to disseminate statements such as these.
It’s a time to keep a cool head. Sarah Hewin, chief Europe economist at Standard Chartered was reported by Reuters as using a degree of sophisticated understatement when stating that:
“Having a front-runner who has clearly stated no-deal is an option, is a concern”.