10 January 2020: Sterling survives selling pressure

Sterling survives selling pressure

10th January: Highlights

  • Departing Carney shoots down Sterling
  • Global tensions ease as dollar continues to strengthen
  • Weidmann acknowledges Libra threat

Outgoing BoE Governor usurps his replacement; warns of rate cut

Mark Carney, the outgoing Governor of the Bank of England chose a rather odd time to make a prediction about the future direction of interest rates in the UK.

In a speech yesterday, Carney commented that there could be a “relatively prompt response” to the current weakness of the UK economy. While it remains Carney’s prerogative to make such comments his successor as Governor will now have his hands pretty much tied when he takes up the role in March, unless the MPC acts beforehand.

While the timing of the comment was possibly odd, it gave the market an insight into Bank of England thinking about the current state of the UK economy. It was no surprise that the MPC may consider a cut in rates given that any post Brexit boost will likely be delayed. The withdrawal agreement which comes into force on 31st January is something of a red herring since nothing much will change until the end of the year.

The money markets are pricing in a 60% chance of a rate cut this year, so Carneys words merely confirmed their view. However, hearing it from the lips of the (Current) Governor galvanized traders who had started to see Sterling as something of a risky bet with tough negotiations with Brussels looming and they promptly trimmed long positions that had been building for some time.

Sterling fell to a low of 1.3012, closing at 1.3066. The 1.30 level remains pivotal and despite Carney’s words there is no desire to see the pound fall much further. In fact, as the dust settles, it may be that those same traders who divested themselves of part of their long positions decide to start to add to their positions again

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NFP day sees dollar on the advance

In the smoke and mirrors world of international diplomacy it is becoming increasingly difficult to understand what is genuine and what is simply propaganda.

Several prominent commentators at the time of America’s assassination of Iranian strategist Qasem Soleimani, said that while the strategy is risky it could turn out to be a masterstroke if it illustrates the relative weakness in Iran’s response to the action.

President Trump commented following the Iranian’s attempt at revenge, by attacking two military bases deep in Iraq, that the Iran Supreme Council appears to be standing down

The crisis is far from over since Iran is not capable of an immediate response of a similar calibre to the original attack, but that not is not to say it incapable of planning over a relatively short period.

Translating that scenario into the financial markets, the dollar continues to be regarded as a safe haven currency, despite the JPY and CHF failing to make any advances.

The dollar’s fate will transfer from international politics to the domestic economy today as the December employment report is released.

It seems an age since the November report was released which was supposed to see the advent of a month of positive data, heralding the demise of the “soft spot” The reality was somewhat different as data remains mixed and there is a certain trepidation about today’s release. Predictions remain for around 164k new jobs to have been produced. That will mean 430k new jobs having been produced in the past two months which is still positive in any part of the economic cycle.

The dollar index remains positive having broken through two fairly significant resistance levels at 96.80 and 97.20. It rose to a high of 97.56 yesterday, closing at 97.44

Weidmann backs Lagarde call for “official” cryptocurrency

Jens Weidmann, “the man who would be king”, made a speech yesterday in which he agreed with his new boss at the ECB, Christine Lagarde, about the threat posed by the release of a new cryptocurrency by a prominent global player. Facebook’s Libra has had several teething issues but fits the bill as the looming “bogeyman”

Central Bank’s seem to be “missing the point” of cryptocurrencies. One of the major “benefits” is that they are deregulated and the one thing that is certain about a Central Bank issued crypto is that it will be heavily regulated although it will probably take an age to actually see the light of day.

The growing sense of cooperation between Central Banks willing to share ideas has been perfectly illustrated with this issue as the Fed’s Lael Brainard, BoE Governor Mark Carney and Christine Lagarde have all commented recently about their concerns over Libra.

Deregulation and the effect of a globally acceptable cryptocurrency do not fit with the ECB’s views, particularly given the issue of its effect on monetary policy., since it would play havoc with money supply, which outside of Central Banks, is kind of the point.

Weidmann the Chairman of the Bank of International Settlements (the Central Bank’s Central Bank) and President of the Bundesbank was thought to be a shoo-in for the job of President of the ECB until politics played a part.

Data for unemployment was released yesterday, and using the recent measure an unchanged number, 7.5% for the entire region, was seen as positive despite failing to arrest the fall in the value of the single currency.

Yesterday it fell to a low of 1.1092, closing at 1.1106 as it battles to stay above the 1.11 level. Trendline support at 1.1120 has now been broken following yesterday’s close and the next level on the downside is around yesterday’s low.

Have a great day!
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.”