25 February 2020: Sterling trading around 1.2980 support

25 February 2020: Sterling trading around 1.2980 support

Sterling trading around 1.2980 support

25th February: Highlights

  • Sterling back to bottom of recent range
  • Virus fears push dollar index towards 100
  • Mixed IFO looks ahead to better times

Market expecting improvement in activity survey

The pound suffered at the hands of a strengthening dollar yesterday as fears that the Coronavirus outbreak will become an uncontrollable pandemic.

It has fallen back close to the support at 1.2880 as the market awaits the release, later this morning, of the CBI Distributive Trades Survey. This report provides a forward looking indicator of the prospects for wholesale and retail distribution in the coming months.

It is the most forward looking of the leading indicators as it looks at output as well as consumption. It is one of the more interesting pieces of data to the Bank of England as it provides a significant outlook for the entire economy.

A report from the Resolution Foundation released yesterday predicts that UK Government borrowing will top one trillion pounds this year. This will eclipse the spending of the Blair Government. This would place Government spending at about 40% of GDP. This will be part of Prime Minister Boris Johnson’s drive to level the playing field between North and South. Since the governing Conservative Party has virtually conceded that the capital is now a sosuialist stronghold he is continuing his efforts to break the red wall by which huge swathe of the north of the country was traditionally socialist due to its industrial and trade unionist background.

The pound remains well supported while it is expected that trade talks between the UKand Eu will start in the coming few weeks. While there is still concern that the outcome will be difficult for both sides, analysts are confident that Johnson will ensure that the Eu is convinced that to use an old phrase, no deal is better than a bad deal.

Yesterday, the pound fell to a low of 1.2886, closing at 1.2931

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Dollar falls back on its safe haven status

While global equity markets fell by close to 4% and e DJI at one point yesterday fell by more than 1,000 points. the dollar remains very well supported due to its safe haven status.

Despite the epicentre of the Coronavirus outbreak in Hunan, China reports fewer new cases being reported, there are growing concerns that the spread is becoming impossible to contain. With South Korea now the second most infected country followed by Italy, the global nature of the issue is impossible to ignore.

Following last week’s Philly Fed Manufacturing Index leaping to its highest level in four years, yesterday’s Dallas Fed index was also much improved. It rose from -0.2 in January to +1.2 this month.

While there may have been a relatively slow start to the year, the economy is starting to pick although the FOMC will continue a watching brief as it has no way of gauging the effect of Coronavirus on the economy.

With Consumer Confidence, Durable Goods and new home sales data due for release this week before next week’s employment report, the fed will have plenty to consider before its next meeting on 17/18 March.

The first (and very speculative) expectations for the employment report started to be issued today. Consensus is looking for a headline of +200, which is hardly a daring call.

Yesterday, the dollar index continued its assault on the summit of mount 100. It reached a high of 99.64 and closed a little lower at 99.19. The only remaining questions seem to be will 100 be conquered and what happens after that?

Current expectations remain weak

The IFO institute in Germany canvasses 7000 businesses in German every month to canvass their views on current expectations for the business climate, an assessment of the market in general and what their expectations are for the medium term.

While this only relates to 80+ million out of 513+ million EU citizens, the German economy punches well above its weight.

The results of the survey showed that, in keeping with recent activity surveys, there is a degree of pessimism about the current situation but going forward there is a degree of confidence returning. Other than the fact that if no one is confident about the future, they may as well shut up and go home, it is hard to find the specific reason for optimism.

Industrial and consumer confidence for the entire region is released later in the week and this has a more realistic view. Analysts see that the best that can be achieved is for confidence to be unchanged.

The next meeting of the ECB may have to consider a cut in rates to add stimulus to markets if the Coronavirus outbreak currently causing major concern in Italy spreads further through the region.

Yesterday, the euro traded in a narrow range between 1.0872 and 1.0805

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.”