Discussion and Analysis by Charles Porter:
Following the modest gains that Sterling made throughout yesterday afternoon, on the whole, Sterling opens mildly stronger. The biggest mover overnight was the US Dollar. In particular, the Dollar has gained ground against the Euro, with the EURUSD currency pair currently trading at its lowest level in over three months. Elsewhere, the RBA chose to keep interest rates on hold, citing ’uncertainties’. The language of the decision at 03:30 BST briefly strengthened the Aussie Dollar, however, the gains were short-lived.
Sterling Briefing: Recovery
Following the shock devaluation of the Pound on Thursday of last week, Sterling has gained back considerable ground. Posting consecutive intraday gains for the last three days, a considerable proportion of the devaluation generated by the Bank of England’s Monetary Policy Decision has been reversed.
With sparse data and events planned for the beginning of this week, there are few anticipated phenomena that contain the propensity to move the Pound considerably. With production data out on Friday and, in particular, Brexit negotiations commencing on Thursday, news from home and abroad may unsettle the stability of Sterling.
Euro Briefing: European Bear
The shock devaluation of the Euro caused by a ’dovish’ tapering of Eurozone quantitative easing was in excess of 1.5%. Following this event, the Euro appears to have entered into a bear market – consistently losing ground against other currencies. These trends appear to be a market correction back from the bout of considerable Euro strength that we saw at the start of September.
Given the short term bullish market we are witnessing in the Pound, this episode improves the bargain of those selling Sterling and buying Euros. Moreover, with Mario Draghi, President of the ECB, speaking publicly this morning, Euro markets could prove sensitive as they strive to price in the path of European monetary policy.
Dollar Briefing: Asia Tour
Following the Japan leg of Trump’s tour of Asia, President Trump has arrived in the South Korean capital of Seoul. There will inevitably be a plethora of press conferences and opportunities to hear from the US President. The sound bites from these events always contain the propensity to move markets, particularly when the salient issue of US defense policy is on the table. For now, there looks to be little recoil or encouragement within the Dollar derived from any of Trump’s comments, however, we will wait to see if this trend holds.
Regarding the US again, Randal Quarles, vice chairman of financial supervision at the Federal Reserve, will be speaking. This is his first speech in the role and, therefore, there will be a considered attempt to price in his potential influence within the Fed.
The Days Ahead:
The Reserve Bank of New Zealand will unveil its latest monetary policy decision on Wednesday evening, UK time. With the present rate of 1.75% having been held since the start of the year, and inflation looking more healthy, it is not implausible for the Bank to raise the Official Cash Rate. The previous monetary policy statement revealed that the Reserve would not be averse to raising the target rate soon, releasing risky upside potential into the New Zealand Dollar.
The absolute trading levels of the Pound Sterling, when considered over the long-term, are primarily down to Brexit uncertainty. Therefore, any event that has a reasonable chance to clarify the future status of the UK vis-à-vis the world and Europe will provide support to the Pound (provided it is not disastrous news!). The market importance of Brexit negotiations and politics is therefore hard to overstate.