WAS YESTERDAY JUST A BLIP IN THE DECLINE OF GBP VS USD?
Last week Sterling shed over 400 pips versus the Dollar. Yesterday the pair witnessed a technical recovery as the Asian and European desks ditched the US dollar. GBPUSD (Cable) rose to a high of 1.5128, before trimming gains to close the day around 1.5113. The Dollar did find some love in the US trading session, but still, the markets chose not to extend Friday’s USD rally. The week ahead will see UK employment figures, but more importantly, a speech by Bank of England (BoE) Governor Carney. If he remains dovish, expect more downside to Cable. Even more Federal Open Market Committee (FOMC) members are due to speak at various times throughout the week which could compound the losses further. The US retail sales due on Friday may not alter rate hike bets as the markets now consider the December rate hike as a done deal.
US Dollar positive/Euro negative sentiment was reinforced by a Reuters article that the European Central Bank (ECB) was considering taking benchmark deposit rates into deeper negative territory. The theory is that increasing the interest rate it charges banks to park money overnight would incentivise banks to put all their money to good use and lend more. Speeches from ECB members are key following yesterday’s rumours of an aggressive rate cut. The fear of aggressive ECB action is putting a solid cap on the topside of the Euro, and the divergence in direction of the ECB and the Fed is very clear now.
The UK labour market report, expected on Wednesday, will be key for Sterling trading this week. Will a strong report bring a BoE rate hike on to the radar again? Looking at the broader picture, the soft tone at the ECB press conference pushed EUR/GBP lower again in the longstanding sideways range. The pair tested the 1.3897 support and the level was ‘really’ broken after the FOMC announcement. A retest occurred last week after a soft BoE inflation report, but the test failed and we are now back in the 1.4000s.
Elsewhere…Despite weaker than expected trade numbers from China yesterday, commodity currencies were, surprisingly, not impacted negatively. The Aussie, Canadian and Kiwi Dollar all traded slightly higher versus the Greenback. This came even as China’s trade surplus hit a record high as exports fell to -6.9%, which was twice as bad as expected. Imports also fell to -18.8% last month which shows us that internal and external demand has diminished significantly. If this trend continues, it’s difficult to see how commodity backed currencies will stave off a prolonged period of weakening demand. It’s even harder to see how the Reserve Bank of Australia can maintain an optimistic outlook in an environment of persistently weak Chinese economic activity.
At 11.15am ECB member Coeure speaks in Berlin.