Sterling has staged big rallies across the board. Much of this new strength comes on the back of heightened expectations that the Bank of England (BoE) will increase interest rates even sooner than previously expected. As the market fully digests this new timeline in interest rate hikes, sterling has caught bid as traders buy in anticipation of tighter monetary policy.
While a big reason for the rally in sterling, monetary policy is not the only reason. Global deflation, due to the crash in oil prices, has caused other currencies to weaken considerably. As such, sterling has been able to rally to multi-year highs versus currencies like the Canadian dollar, the euro and the Australian dollar. Lastly, the sterling is catching bid as a safe haven currency. The discord between the the new Greek government and the rest of the European Union and continued manipulation by the Swiss National Bank in the francs markets, has traders piling into sterling as the only desirable European currency available. As long as these conditions continue to persist, expect sterling to continue to benefit on the long side in the medium term.
The U.S. jobs report was phenomenal. All kind of good points including a rise in the participation rate and an uptick in wage earnings. Finally! But 1 data point doesn’t make a trend. A data point that did trend this week, however, is U.S. retail sales. Retail sales in the world’s largest consumer economy missed for the second month in a row. And it missed big.
US December and January retail sales combined -1.7%
This has sent the USD to consolidate lower across the board. Even oil has managed to stage an impressive rally to close the week. Oil continues to be a major headline in the markets. It was mentioned throughout the Bank of England’s Quarterly Inflation Report. With low inflation in the UK, due to oil prices, coupled with wage growth, the BoE believes inflation to rise faster than expected. Thus, rate hike expectations have actually accelerated resulting in a renewed rally in the GBP that could drive direction in sterling pairs in the mid-term.
It’s been an incredible month. Our first trading month of 2015 is in the books and it did not lack for surprises and drama. Crashing oil prices kicked off volatile trading as the new year began. The Swiss National Bank got things going with their surprise abandonment of their currency peg to the euro and interest rate cut into negative territory. The Bank of Canada surprised markets too with its interest rate cut much sooner than markets expected. The European Central Bank also managed to surprise with a larger than expected quantitative easing package. The Federal Reserve surprised markets too but in the other direction. While it did not make any changes to monetary policy, the $FED remains hawkish following Yellen’s hawkish signals in December. Finally, the Bank of England turned seemingly dovish with its hawks relinquishing their call for interest rate hikes. The incredible drama series that was January certainly sets the stage for a new normal to emerge in 2015.
Of course, the only thing still on the wire is the Scottish referendum. But the Scots stand to rock the world as secessionists everywhere get emboldened by the possibility of independence. Naturally, the referendum polls are just as emotional as the voters they reflect. Sterling spiked to new weekly lows across the board as the Yes vote took lead last weekend. Then the No vote moved ahead as the trading week unfolded and sterling surged big time right back to familiar highs in all the GBP pair majors. Headed into the actual election this week, expect price to actually weaken as buyers take profit and sellers take advantage of the recent highs. Even with the Bank of England set to make a monetary policy announcement, all eyes this week are on the referendum vote. Friday, the day after the vote, will be the most interesting trading day of the week and may set the tone for the rest of the year.
Scotland and Zanzibar share a related history and perhaps a smilier fate. (Africa Is A Country)
The UK has issued a reminbi-denominated bond, only the 2nd eurobond in its history. It’s has to pay for this divorce somehow. (Xinhua)
Why everyone in the world will be listening to Yellen this week. (Business Insider)
There are 5 lessons GBP traders can learn from the Quebec referendum (Forex Live)
The markets have known about the upcoming Scotland referendum for months now. And it was largely ignored because it didn’t seem like anything could break up this unhappy union. Now GBP sterling is looking like a currency union all out of nowhere. No one calculated that kind of government risk from the Old Lady. The market has been taken for a loop. This extreme market reaction may only the beginning because it is yet another changed expectation in sterling’s long-term sentiment. Traders are starting to believe that the market could get more volatile still. What I had thought was a non-event just months ago has thrown another interesting fundamental twist to the landscape. A currency crisis could give this reversal some real legs to undo last year’s sterling rally.
The options market saw this drop coming last week. (WSJ)
It seems to me that the bulls are still safe. Despite the stalling at highs 2 weeks ago and the inevitable selloff this week, sterling looks well-poised to begin its move higher from current levels. The charts look great with the selloff in $GBPUSD right into 1.6950; and the rally in $EURGBP capped by 0.7950. If these areas of support for sterling hold, it could be off to the races as sterling pushes higher again. But has there been a fundamental change that would support further GBP weakness? This rally has been fueled, first, by economic growth and, now, by interest rate hike expectations. The market will, however, pay attention if the data misses reported throughout this month become a trend. And such a trend will temper the market’s expectations for interest rate hikes. What happens when the BoE decides instead to taper its QE program? Or if the $FED does raise interest rates? How safe really is this GBP rally? Consider it is safe for now.
Advancement in the GBP trend has stalled this week. Manufacturing and construction data missed this week and the Bank of England’s hold on monetary policy turned out to be a non-event. Sterling weakened briefly on the policy announcement but momentum never really took hold in either direction. Dips were bought but highs were also met with enough offers to keep price capped for another week. This stalling, sideways action is simply consolidation of the bull rally that has gained strength in the past month. Now as the 1st full week of trading of the 3rd quarter comes to a close, sterling remains in a tight range. Despite the tepid price action this week, sterling remains fundamentally strong. Between the US Federal Reserve and the European Central Bank, the BoE looks tremendously hawkish. Until that contrast changes, it is enough to keep sterling supported long term.
So here we are with $GBPUSD back above 1.7000. It is the first time since 2008 since we’ve traded at these levels. To me, nothing is more bullish than $GBPUSD above 1.70, $EURGBP below 0.80, $GBPAUD above 1.80 and $GBPJPY above 170. But the bears are milling and are suspect of these rallies.
I admit I’m wary too but for another reason. $GBPUSD hasn’t had a decent correction yet.
This was Monday. Since then, $GBPUSD has staged a correction to 1.9950 support from the 1.7050 highs. $EURGBP retraced 38.2% to 0.8030 this week. And I think that’s all we will get. Another Friday close above 1.7000 in cable after more remarks from Carney this week is a bullish indication. The fundamental landscape clearly still supports a strong GBP. What can turn the sterling tide? Mark Carney, of course.
Bank of England Governor Carney has just shocked the market signaling that interest rate hikes could come sooner than the market expects. GBP has skyrocketed across the board on these comments and it should. I just sat in with FXStreet’s Dale Pinkert on Monday saying that UK fundamentals remain strong but I believed that sterling would take advantage of the low volatility and summer trading doldrums to consolidate further. I didn’t think Carney would rattle markets until the August Inflation Report. Instead, he is well ahead of schedule and has put sterling back on track to reach new highs across the board. Already, $GBPUSD has probed 1.7000 and $EURGBP has broken below 0.8000.
Yesterday, $GBPUSD fell to new lows just pips ahead of the 50% Fibonacci level at 1.6536. It was the move many of us had been waiting on for weeks. Now that the consolidation in $GBPUSD is finally over, I believe we will see GBP resume its rally in many of the major pairs. The UK fundamentals have been there and the strong recovery is its reality.
However, what is interesting is the reversal that is beginning to confirm itself in the comm doll pairs. I expected these pairs would weaken to key support levels. However, this week, for the 1st time in months, those support levels are being broken. We may be on the cusp of D-Day where swing buyers start to sell and bail out of the market. OR. It could be an incredible buy opportunity because of the BoE minutes and FOMC announcements this week.
The BoE minutes are out and they are hawkish. (eFXnews)
I saw it too but it never counts unless you publish. These guys were 1st to show this incredible H&S in $GBPAUD. HUGE level. (Twitter, Factor)
The $GBPNZD put in a huge level too. While I thought 1.95 was key, 1.9150 proved to more significant. (Twitter, FMFX)
Raising interest rates vs. tapering QE — interesting take (Telegraph)
The huge bounce off support in the $GBPCAD this week very nicely reflects a dovish Bank of Canada and overall weakness in Canada versus a hawkish Bank of England and robust UK. (Ashraf Laidi)
A review of the $GBPUSD move we have been waiting on all month (FMFX)