Sterling rally consigned to History
4th May: Highlights
- Sterling rally difficult to sustain
- How will the continuing feud with China hit trade talks?
- ECB’s Lane: three years to reach Dec 19 level
GDP release likely to attract sellers
While it is likely that the reason for a fall back in May may be different it is still likely to follow the same pattern as the repatriation influence wears off. The pound will be left lacking support and at a level ripe for the bears to become interested.
With the market likely to be interested in the NFP data from the U.S. on Friday which coincides with a UK holiday, volatility could ramp up from a slow start today.
Acting in manner more like the Fed than the ECB, the Bank of England has taken up a watching brief as the Government deals with the fiscal necessities of the pandemic. This week’s MPC meeting may add further QE, it is unlikely to make it open ended like the Fed, but Andrew Bailey is sure to provide a greater degree of advance guidance than Christine Lagarde.
The Bank of England has bought more than double the amount of assets it bought during the financial crisis on a monthly basis. Bailey has an enviable but slightly worrying dilemma. He has said that the Bank will do whatever is necessary and, so far, the markets have taken him at his word, but what if they call his bluff and test his mettle? What happens then?
Last week, the pound reached a high of 1.2643 as it managed to match its high from two weeks before. It is likely that sell orders will be set at around that level should it try to break higher for a third time.
Trump not happy with Beijing
The first phase ended with both sides pronouncing themselves satisfied with progress so far but with the devil being in the detail as usual, it looked like China had come out on top no matter what President Trump may have said.
Part two of this saga was about to start when the Covid-19 pandemic was in its infancy and talks have therefore been delayed.
There have been enquiries made by the WHO, questions asked by various countries, accusations made by the U.S President and even a few conspiracy theories, but for now we have to accept that it was no more than a natural phenomenon.
That has not stopped Trump pronouncing himself not pleased with China. Just whether he is not pleased that the outbreak was not better contained or over some more nefarious act we do not know yet. However, the question remains how will the comments made already harm the delicate balance between the two superpowers if and when talks resume.
China is unlikely to feel any need to be defensive while the U.S. will need to be a little cautious. Who has most to lose? Hard to say but China will face calls for the reining in of globalization and there may be demands in the U.S. to repatriate certain industrial and manufacturing processes that major industrial conglomerates have exported to aid bottom lines.
With unemployment expected to top 20 million those calls may be impossible to ignore. That will see profits fall and the stock markets may be affected.
For now, the U.S. has to contend with a contracting economy but has the advantage of a Central Bank ready and willing to do whatever is necessary, as it has already demonstrated.
Following last week’s release of Q1 GDP data and the FOMC meeting, the dollar index fell to a low of 98.80 and closed at 99.01. While the 100 level appears pivotal, there are decent sized buy orders just below last week’s low which should provide support.
Cautious lifting of lockdown may lift sentiment
In light of Christine Lagarde’s recent comments about the role of the ECB in the bond markets, Lane appeared keen to clear up any misunderstanding by saying that one role of the ECB is to close the widening spreads between various nations of the Eurozone. He said that limiting borrowing costs for the more indebted nation is a duty of the Central Bank.
Several nations cautiously lifted their lockdown restrictions over the weekend with Spain and Italy allowing people out to exercise for the first time in weeks while Germany allowed church services to take place.
This is likely to see consumer confidence and sentiment rise a little. However, in the longer term a month or so difference in the lifting of the lockdown does little economically but could see a second spike in infections.
The single currency clawed its way above the 1.10 level on Friday more in reaction to dollar strength than any particular desire to either reduce short positions or to actually go long euros.
Those longer-term short positions will remain in place until the sell orders above 1.1020 have been satisfied; the inability of the euro to actually close above 1.10 doesn’t bode well for its fortunes this week.
The EU Commission will release its economic forecasts tomorrow. This will give an internal view on how bad the recession is likely to get following the recent report on the global economy which saw the Eurozone economy shrinking by over 7%.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”