- Chart support at 1.2997 while 1.3156 guards 1.3285 & 1.3515.
- But economic data, BoE expectations, dominate GBP this week.
- November GDP, CPI, retail sales and BoE speakers coming up.
- U.S. CPI, retail sales, Chinese GDP, trade deal are key this week.
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Pound Sterling starts the new week in the red against the majority of major currencies, including against the Greenback which has picked up a head of steam over the course of the past week, taking GBP/USD close to a key support level on the charts.
Sterling has underwhelmed following 'dovish' comments from outgoing Bank of England (BoE) Governor Mark Carney out last week who said in a speech that in a speech that the Bank stood ready to deliver a "prompt" response to weakness eyed in the UK economy over recent months; a signal to markets that an imminent interest rate cut could be at hand. The rule-of-thumb in currency markets is that when a central bank engages in interest rate cuts, the currency it issues loses value. Markets had been expecting an interest rate cut at the Bank of England in 2020, just not this soon.
The Pound was unable to recover the intiative against a greenback that bested all major rivals last week and which could well carry positive momentum into this week. "All conditions seem united for allowing the greenback to appreciate further short-term. Easing Middle East tensions combined with both the state visit of Chinese Vice Premier Liu He to sign the interim trade deal in Washington due next week along with upbeat labor data releases on Friday should put the greenback on track to post its strongest weekly gain in two months after a two-week session loss," says Vincent Mivelaz, an analyst with Swissquote Bank.
"GBP/USD is under pressure while capped by the near term downtrend at 1.3156 to head back to the 55 day ma at 1.2997. Failure here will trigger a slide to the December low at 1.2908," says Karen Jones, head of technical analysis at Commerzbank. "The downtrend guards the Fibonacci resistance at 1.3285. This is considered to be the last defence for the December high at 1.3515. Failure at the 1.2908 support would target the 200 day moving average."
Above: Pound-to-Dollar rate at 4-hour intervals with Fibonacci retracements of the post-September uptrend marked out.
Jones says that any fall below 1.2908 by the Pound-Dollar rate would put the 200-day moving-average of prices, currently located around 1.2690, back on the table. She says Sterling will remain biased to the downside so long as it's below the 1.3156 level, which coincides with a downward sloping trendline that's currently acting as resistance for the exchange rate. The Pound needs to rise above that level to regain the initiative over the greenback and then target the1.3285 and 1.3515 thresholds.
Commerzbank technical analysts are betting on an increase in the Pound-Dollar rate over the coming weeks and months after having picked up the UK currency at 1.3015, although they have a 'stop-loss' at 1.2995, which means they'll walk away from their wager if that level materialises. The bank is targeting a move up to 1.3095 and 1.3125.
The Pound turned a corner in August 2019 after Boris Johnson won the Conservative Party leadership election and Prime Minister's residence but took another leg up when the newly minted leader returned from Brussels claiming to have secured the changes he was seeking to the 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-Dollar rate at daily intervals with Fibonacci retracements of the post-September 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 U.S. Dollar: What to Watch
The Dollar was humbled Friday and quoted lower against all but two of its major rivals come the closing bell, although it was still top of the major currency class for the week overall and has a good shot at remaining in pole position over the coming days due to events in the global economic and political calendar.
Investors appeared to be willing to buy Dollar whatever the weather last week and may remain in a similar mood over the coming days, with the greenback benefiting from an increase in tensions between the U.S. and Iran as welll as a quick de-escalation. It wasn't until the December non-farm payrolls report left investors with a sour taste in the mouth on Friday that the greenback eventually ceded ground the rest of the major currency basket in unison.
The Dollar still acts as a safe-haven so can benefit from geopolitical tensions while the 1.75% cash rate of the Federal Reserve (Fed) is still the joint-highest in the developed world so the U.S. currency also tends to benefit from yield-seeking among investors during times when risk appetites are robust, mostly at the expense of lower yielding rivals like the Euro, Pound and non-Dollar safe-havens like the Yen and Swiss Franc.
"The Phase one signing ceremony will likely be the highlight of next week (Wednesday). It would be a massive shocker if the deal is not signed next week as even the Chinese side sounds positive. The new Chinese Fin-Twit Darling, Hu Xijin, has essentially promised the world that the deal will be signed and even went as far as praising Trump’s Iran press conference. The actual substance of the Phase one deal is highly debatable," says Andreas Steno Larsen, a strategist at Nordea Markets.
The first risk event for the Dollar and all other currencies this week is the release of U.S. inflation data for December at 13:30 on Tuesday when markets will be looking for the consumer price index to have risen 0.2% at year-end, in line with the move from the previous month. However, that's expected to lift the annualised rate of inflation from 2.1% to 2.3%. Meanwhile, the more important core inflation rate is seen remaining unchanged at 2.3%.
Official measures of inflation will then be above the 2% target, which in ordinary times might be enough to get the market talking about rate hikes from the Fed. But given the global backdrop and pressure from President Donald Trump rate hikes are expected to remain off the agenda through 2020. As a result, it's not clear what impact Tuesday's numbers will have on the greenback.
"Its hard not to be skeptical about the upcoming signing ceremony for the China-US Phase I trade deal given what we haven’t been told: its contents. Set to be concluded next Wednesday (or “shortly thereafter” according to President Trump’s latest comments), it’s highly unusual that this close to that date, the text of the deal has yet to be released. A translation into Chinese doesn’t take this long," says Avery Shenfeld, chief economist at CIBC Capital Markets.
U.S. retail sales figures for the month of December will be released at 13:30 on Thursday, proving investors with an early steer on the likely strength of consumer spending and the broader economy ahead of year-end. Consensus favours strong 0.4% increases for both headline as well as core retail sales. And then Chinese final quarter GDP data will be released in the early hours of Friday morning, with markets looking for the economy to have grown at an unchanged annualised pace of 6% into year-end.
Both of those latter releases will telling of the broader global economic performance around year-end but for the Dollar at least, the main event in the week ahead could be the anticipated signing on Wednesday of the much-vaunted but ever-elusive 'phase one deal' between the U.S. and China. Markets have still not seen the text of the agreement so are nonethewiser as to whether it does what President Donald Trump set out to do. And the answer to that question is key to the outlook for trade tensions.
"All of this should be a reminder that the sigh of relief we heard in ﬁnancial markets on news of this deal looks premature, particularly since after the 2020 election, we might be heating up the trade war on the European theatre of operations. The flash points there include autos, US concerns over subsidies to Airbus, a French tax on the earnings of large US-based digital companies, and coming in 2020, a draft EU climate law that could include taxes on carbon-intensive imports from countries that are more lax on climate change action," says CIBC's Shenfeld. "Which country could that be?"
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