- Pound Sterling starts new week in the red
- Upside bias to remain in place so long as chart supports intact.
- But economic data, BoE expectations, dominate GBP this week.
- EUR takes cues from ECB minutes, Lagarde and global factors.
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Pound Sterling starts the new week lower against the Euro and other major currencies but the latest technical studies suggest the GBP/EUR exchange rate retains a decent level of support on the charts, and weakness should therefore ultimately be short-lived. However, expect Sterling's resilience to this week be tested by several key pieces of economic data.
The Pound-to-Euro exchange rate ended the previous week with a gain, after the British currency proved more resilient than its continental counterpart in a week where the news agenda was dominated by rising and then falling tensions between the U.S. and Iran. Price action has ensured the British currency's shallow post-election uptrend remained intact on the charts but gains would have been greater were it not for comments from outgoing Bank of England (BoE) Governor Mark Carney who sent Sterling tumbling mid-week.
Carney said there remained a strong case for lowering interest rates in light of ongoing economic weakness in the UK, and market expectations for an interest rate cut to be delivered by the Bank in early 2020 have increased. The rule-of-thumb is that currencies tend to fall when their issuing central bank enters an interest rate cutting cycle. The threat to the Pound of another interest rate cut was reinforced over the weekend by Bank of England policy maker Gertjan Vlieghe who said he would vote for a rate cut if there was no sign of a rebound in activity after the election.
Data this week will be key, but we feel that it is only when we get the PMI survey figures out at the end of the month will the market get a real sense of what the Bank might do.
Looking at the charts, while Sterling is weaker at the start of the new week, it will have the benefit of several nearby technical levels that are tipped to offer support against a Euro that's recently proven more susceptible to the overtures of the Dollar than the post-election Pound.
"EUR/GBP is trying to recover but its path is blocked by the 5 month downtrend at 0.8561 and the 55 day ma at 0.8534," says Karen Jones, head of technical analysis at Commerzbank. Flipping the equation around to look at it from the GBP/EUR angle, Jones says the Pound has support levels at 1.1717 and 1.1680.
While supported here, Jones says a positive bias in Sterling will persist. Jones says she will err on the bullish side and allow for another break higher and possible retest of the 1.2137 recent high, together "with the 55 quarter moving average" at 1.2157.
For those wary of further declines in Sterling, Jones says should the Pound-Euro exchange rate move below the 1.1615 December low, "this would allow for a test of the 200 day moving average" at 1.1386.
The Pound turned a corner and started moving higher in August 2019 after it became clear Parliament would block a 'no deal' Brexit, it took another leg up when Prime Minister Boris Johnson returned from Brussels with a new EU withdrawal agreement.
December's election victory brought on another noteworthy move higher as markets saw the prospect of a 'no deal' Brexit fading and orderly exit rising. It's now consolidating those gains.
Above: Pound-to-Euro rate shown at daily intervals with Fibonacci retracements of the post-August uptrend marked out.
Pound Sterling: What to Watch this Week
Pound Sterling was rocked last week when BoE Governor Mark Carney surprised the market with a 'dovish' speech that's elevated the importance of economic figures due for release in the days ahead.
Carney said the MPC is contemplating whether to bolster their anticipated economic pick up with an easing of monetary policy and that interest rate cuts will follow any signs that the economy has softened further. He also claimed the bank has scope to provide stimulus equivalent to 250 basis points of rate cuts even though Bank Rate is at just 0.75%, before suggesting there's scope to double the size of its £60 bn post-referendum quantitative easing package.
"Comments from Bank of England governor Mark Carney and Silvana Tenreyro suggest that the central bank may have ended their Brexit moratorium and be edging towards a rate cut. If so, this would probably take place at the 7 May meeting. The UK jobs data will probably have the biggest say as to whether the BoE cuts rates," says Chris Turner, head of FX strategy at ING.
Sterling isn't priced for a rate cut any time soon so the week ahead's economic figures, beginning with Monday's November GDP number, will now garner increased attention from the market. Consensus is looking for a second consecutive 0% change in November, which would take the economy across the halfway point of the final quarter without it having grown at all.
"We continue to see the economy contracting in November, with GDP shrinking by 0.1% m-o-m. The drop is a result of car factory shutdowns as well as a drop in services activity. Importantly, our quarterly nowcast models continue to show a weak Q4, with GDP coming in around -0.1%," says Sanjay Raja, an economist at Deutsche Bank. "Pay attention to the retail sales print. It should give us a first glimpse of activity in December, at least with regards to hard data."
Wednesday and Friday will also see inflation and retail sales data released although Deutsche Bank's Raja says figures out the following week will be more important for the BoE. Nonetheless, markets are looking for inflation to have remained at 1.5% in December, below the 2% target, and for the more important core inflation number to have remained at 1.7%. Retail sales, an important indicator of consumer health, are expected to have risen 0.8% for December after falling -0.6% in November.
Above: Other UK economic data due through this week along with results anticipated by market. Source: Netdania Markets.
Raja says retail sales should have recovered strongly from their earlier fall due to Black Friday and Cyber Monday promotions ahead of the festive period as well as that discounting could have increased footfall on the High Street.
"With spot trading at around 1.30, we think GBPUSD is a "buy" on a 3-6M horizon, though we anticipate a resumption of downside risks in the second-half of the year, towards the end of the Brexit transition," says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "The 1.35-1.37 range in the pair is achievable beforehand, in the event of a "positive fiscal shock."
Another factor to watch out for in the week ahead is clues about what could be unveiled in the March budget. Last week analyst attention turned to what scope HM Treasury might have to provide fiscal stimulus to the economy in the coming years, given the March 11 budget statement from Chancellor Sajid Javid is drawing closer. Some including Deutsche Bank's Raja estimate he could have as much as £60 bn to invest over the coming years, which is equivalent to around 3% of GDP.
Any government largesse could be taken positively by the Pound because it might lessen the need for interest rate cuts at the Bank of England. Pricing in the overnight-index-swap market implied on Friday a Bank Rate of 0.60% in May, which is below the current 0.75% level and above the 0.50% that would prevail after a typical 25 basis point cut. That kind of positioning poses both upside and downside risks to Sterling.
"EUR/GBP to trade in range around 0.85 in 2020, but risks skewed towards periods of sterling weakness. We think there's a good chance that EUR/GBP will revisit 0.90 and maybe even get close to last year's highs above 0.93. Further out, we think there's a good chance that EUR/GBP will trade below 0.80 in 2021 as the economy feels the effects of easier fiscal policy and reduced Brexit uncertainty," says Kit Juckes, chief FX strategist at Societe Generale.
The Euro: What to Watch
The Euro struggled struggled last week and was down against both the Pound and Dollar by the closing bell on Friday even after a series of positive economic surprises, with the single currency having proven more sensitive to international developments and susceptible to the overtures of the greenback.
Europe's single currency drew no inspiration from IHS Markit PMI figures hinting at a tentative rebound the continental manufacturing sector for December last week, nor from Destatis reports of a strong rebound in German industrial production for November. Neither any of those nor any of the other positive releases were enough to prevent the continent's unified unit from ceding ground to the Dollar and Pound so it's not clear whether this week's limited number of outputs will have much impact either.
Wednesday at 10:00 am will mark the release of November industrial production figures for the Eurozone and markets are looking for output to have risen 0.3%, partially reversing a -0.5% decline from October. However, risk may be to the upside given that German figures surprised higher for the same month last week. Minutes of the December European Central Bank (ECB) meeting will be released Thursday at 12:45 and the bank's chief Christine Lagarde will speak later that day at 18:00.
Lagarde is due to speak at a New Year reception in Frankfurt and with the ECB saying in December it would conduct a 'strategic review' of its ongoing policy response to challenges faced by the Eurozone, markets will look this week for clarity on what that could involve and what it might mean for the Euro.
"Risk sentiment should start the week on the front foot and be mildly supportive for the dollar against the low yielders such as the EUR. The highlight of the week, in theory, should be the signing of the phase-one of the trade deal in Washington on Wednesday," says Chris Turner, head of FX strategy at ING. "EUR/USD has started the year in a quiet fashion despite events in the Middle East and at the margin is showing a negative correlation with risk – as the EUR builds out its status as a funding currency."
The Euro is often said to be viewed as a 'funding currency' because of the ECB's negative interest rate policy, which means it's super cheap to borrow. It's cheapness sees the Euro borrowed and then sold, enabling investors to park the proceeds in higher yielding assets often in the emerging markets. Such speculation can be enough to keep the Euro under modest pressure when risk appetites are robust and lift it during times of risk-aversion as investors sell out of places like emerging markets.
Europe's single currency has been in decline against the Dollar and Pound since at least the early days of the first quarter 2018 but the year ahead brings with it a new set of circumstances that might enable it to get the better of the greenback at least. Notably, the November election and preceding campaigns could place a question mark over the Trumpian economic and foreign policies that have lifted the Dollar so much over the last couple of years.
"As a result of US-Europe growth convergence, US-Europe relative monetary policy, a calmer geopolitical environment and favourable EUR FX valuations we expect EUR/USD to trade at current levels and approach 1.16 by end-2020, with risks to the upside if the US Presidential election leads to a USD negative surprise," says Jordan Rochester, a strategist at Nomura. "EUR remains the market’s largest short with leveraged accounts the largest holders. The US data are mixed and are slowing towards trend later this year, the US presidential election also provides a potential USD risk too."
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