Last week in summary
Table of Contents
Another start to the week and pound pushed up touching $1.26 and remained in and around that level due to a lack of influential data from either side of the pond.
The Pound to US Dollar exchange rates were met by volatility last week as political turmoil in the UK spooked markets. As more Brexit news in the form of arguing or more requests of votes of no confidence in various forms again, Teresa May could rock the pair.
Last week on Monday, the Pound cooled by a cent as May humiliatingly conceded “significant opposition to the deal made it highly unlikely it would through the House of Commons.” Tuesday had rest bite as UK wage growth struck a 10-year high as the UK labour market data showed positivity in October. Then the bipolar behaviour took over. GBP/USD hit a 20-month low as rebel Conservatives had gained enough letters to force a vote of no-confidence in Theresa May. It rebounded when the public declaration of support gave expectation that May would survive the vote; 9 p.m. this speculation was confirmed.
Teresa May celebrated by a nice European trip abroad with a begging bowl but it proved largely unsuccessful however as EU leaders rejected her attempts to salvage her Brexit deal. There was strong resistance to renegotiations as they were reluctant to offer her the legal assurances on the issue of the Irish backstop.
Factors building the pressure
Fed expectations
Growing speculation about the Federal Reserve may seek to halt interest rate hikes at some point in 2019 ensured USD sold off against its peers aside from the pound.
The US Dollar gave back its early week growth as US CPI figures inflation slowed to its lowest levels since February following a sharp drop in oil prices. All this despite easing trade tensions between the US and China usually causing demand for safe-haven currencies,
Later in the week, data reporting a slowdown in US retail sales ended a truly bipolar week for the greenback.
The Fed’s rate decision is on Wednesday in which the US central bank is widely expected to raise interest rates for a fourth and final time in 2018. Traders inform us that the hike largely priced in and any upside potential in the US Dollar may be limited. It’s likely to be the Fed’s forward guidance that will dominate USD movement next week, with the dollar potentially retreating if the bank appears looks to slow monetary tightening.
In the UK, the Bank of England will conclude its policy meeting on Thursday, and while no rate hikes are expected from the bank its forward guidance proves positive for the Pound if the bank appears open to multiple rate hikes in 2019 once Brexit is resolved. The UK is a mere three months out from exiting the European Union with MPs poised to take an ill-timed 2-week break with no final agreement governing the withdrawal.
A Goldman Sachs prediction
Could Sterling be immune to any more Brexit debacle – i.e. has Brexit done the main damage, or can it suffer falls below 1.20? Consider, GBP/USD at 1.2605 is higher than the sub-1.20s triggered in the wake of the EU referendum in 2016.
Sheba Jafari, an analyst with Goldman Sachs says near-term could see the Pound remain under pressure, but ultimately a floor should be found in the 1.22 region.
“If the initial sell-off into August lows formed 5- waves, then the market should eventually resume its underlying downtrend,” says Jafari in a briefing to clients dated December 17. “The next level to watch is 1.2573-1.2439. The area includes an ABC target from the September 2018 high, meaning that if it were to hold above the level, there’s a risk this might still be corrective.”
Jafari’s technical assessment is looking for confirmation below 1.2439 with the next level in focus of 1.22 if broken and GS looking to profit at these levels.
“Thinking bigger picture, it’s difficult to suggest new lows in GBPUSD, mainly because of the impulsive nature of the rally from Oct. ’16 through to April 2018. Typically, this should mean that the underlying trend is positive. For that reason, it will be important to watch for signs of a base if/once 1.22 has been reached,” says Jafari.
Outlook: No deal Brexit plans beat expectations
The Pound Sterling US Dollar (GBP/USD) exchange rate is up today and is currently trading at $1.2612 despite Downing Street declaring it will escalate contingency plans for a possible no-deal Brexit.
The US Dollar (USD) is being rewarded for seemingly improved trade relations with China – by agreeing to remove tariffs on US car imports and redacting it’s “Made in China 2025” plan. The market still remains caution of now “slowed economic growth” rather than “just correction” rhetoric.
Today also saw the Secretary of State for Business, Greg Clark, comment that the House of Commons ‘should be invited to say what it would agree with’ with regard to Brexit, raising alarm amongst Sterling investors as May’s Brexit deal looks increasingly unlikely to pass a vote.
Outlook: House prices slump
Today saw the release of the UK’s Rightmove house price index for December which showed a decrease of -1.5% compounding November’s -1.7% drop.
May has come under increasing fire from her Labour opposition, with Jeremy Corbyn declaring her Brexit deal ‘dead in the water’ and that the Government had ‘utterly failed’ in its ‘attempts to deliver any meaningful changes.’ Wednesday brings the publication of the Retail Price Index for November which is expected to dip.
Across the pond in the US NAHB housing market index for December, which also showed a decrease at 56 against last month’s 60.
Outlook: China China China
USD investors and traders should be paying close attention to any developments between the US and China. More so, look for any signs of compromise from either side bolstering market sentiment and not just for USD or Renminbi. Things seem to be cooling and strong words from both sides seem to have stopped for now. The two most aggressive and powerful economics seem to be understanding “the bigger they are, the harder they fall” mentality.
This week ahead and what to look for
Wednesday will also see the release of the US Federal Reserve’s interest rate decision, which is expected to reveal a 25-basis point hike.
Thursday, meanwhile, will see a slew of UK specific data, most importantly of which will be the Bank of England’s (BoE) interest rate decision, with Sterling traders likely to be buoyed by the absence of a rate hike.
Thursday will see UK retail sales figures released for November which is expected to increase slightly on the month, potentially strengthening the GBP/USD exchange rate. Although nothing with this pair is clear-cut at the moment.
