Sterling has survived worse than Brexit
Cable had a choppy day on Friday – Sterling started with an attempt to claw back some of the losses from earlier in the week, but finished around the 1.3900 area. The headline US GDP figure was strong, showing a 1% increase versus the market consensus of 0.4%. The Core Personal Consumption Expenditure also came in above expected as it increased 1.7% YoY, above forecasts of 1.2% in January. Given the negative sentiment that there is around the Pound, we would have expected more losses; perhaps this indicates that traders are hesitating to back the Dollar at this point.
With no data released today that is likely to have a major impact on the Dollar, only a drastic difference to the 0.5% expectation on the US pending home sales could provide some data-based volatility for the pair.
Sterling will have a relatively light data week. The only releases today will be the consumer credit results, followed by the January mortgage approvals – a leading indicator of the health of the UK housing market.
Currently GBPUSD is testing lows last seen in the Great Financial Crisis (2008), on a LONG-term perspective, the pair is actually testing its lowest point for 30 years. Very few money market traders have seen GBPUSD trade below 1.3700, and even then, not for long before a vicious rebound. On balance, Brexit doesn’t seem as big of a challenge as the Great Financial Crisis, and Purchasing Power Parity Indices are suggesting that the Pound is as much as 15% undervalued versus the Dollar.
The Euro area flash HICP inflation will be in focus today as it is expected to decline back to deflation territory mainly due to the lower oil price. Next week’s European Central Bank (ECB) meeting will be under further pressure to remedy this deflation as more uncertainty is being seen in the European market. It is predicted that the central bank will announce further quantitative easing and another rate cut in the Eurozone.
The end of last week saw EURUSD close below 1.10 and it is yet to recover. If today’s CPI figure is weaker than expected it would heighten speculation of a more aggressive ECB action. This could send EURUSD below 1.09, which is possible given that German CPI fell further than expected in February.