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 Tuesday 26 September 2017

Can cable’s rally continue? - PM Bulletin

 

 

Sterling has had a good run so far this year, at least when looked at in context of the US dollar. Back in January the GBPUSD briefly broke below 1.2000, which, in the absence of the October 2016 “flash crash” would have marked the currency pair’s lowest level since the 1980s. Since then, sterling has appreciated steadily, even managing to shrug off continued uncertainty over Brexit negotiations and the Conservatives disastrous General Election result in June. The latter saw the Tories throw away a workable majority and a substantial poll lead earlier in the year in one of the most breathtakingly inept campaigns ever run by the party. This has strengthened Jeremy Corbyn’s position as Labour leader, helping to push the party further to the left than it’s been since the Seventies. As can be heard at this week’s Labour Party Conference in Brighton, the leadership may be unwilling to clarify their position on Europe, but there’s no doubt where they stand on business. Here they are looking to tax, nationalise and regulate. Whatever the arguments in favour of such policies, they are undoubtedly negative for sterling. But despite Theresa May’s weakened position, there’s currently little chance that she will be unseated as Tory leader. It just wouldn’t make sense to challenge her now as the party would run the risk of imploding, just as it did in the 1990s. That being the case, it seems unlikely that there will be an early General Election. Consequently, there’s relatively little chance that Mr Corbyn will be in a position to capitalise on his current popularity.

But much of sterling’s gains have come against the backdrop of a weakening dollar. A quick look at the EURGBP shows that the pound is currently unchanged against the euro since mid-January whereas it is up about 12% against the dollar over the same period. And the dollar has fallen as investors reassessed the relative outlooks for monetary policy across the world’s major central banks. It would seem that the key EURUSD breakout came in late July a few weeks after Fed Chair Janet Yellen testified before Congress in Washington. This was when she pivoted the Fed from hawkish to dovish as she insisted that the US central bank paid particular attention to inflation (or the lack of it) when deciding on monetary policy. Earlier in the year it was assumed that the Fed would plough ahead with rate hikes irrespective of the data in order to “normalise” monetary policy as quickly as possible. It was argued that the Fed wanted wriggle-room to cut rates when the next downturn hit. On top of this, Dr Yellen indicated that the Fed could be much closer to its “neutral policy stance” than commentators were estimating. That suggested that the fed funds target was below the 3% pencilled in by economists. This was confirmed to some extent last week when San Francisco Fed President John Williams suggested the “new normal” could be around 2.5% while Dallas Fed President Robert Kaplan suggested the long-term equilibrium fed-funds rate should be 2.25%. All this is dovish and contradicts those commentators who viewed last week’s Fed meeting as hawkish. This is important as it suggests that the weak dollar trend may not yet be over. However, the big question now is just how close are the ECB and the Bank of England to tightening monetary policy? That’s impossible to know as it feels like that both central banks are led by individuals who are making it up as they go along, but with a decidedly dovish bias.

But investors still have to invest and speculators still have to speculate. Since the beginning of the year the GBPUSD has made a succession of higher highs and higher lows. Yet is rally since early September seems overcooked which is why we’ve seen a pull-back over the last week. But if it can consolidate above 1.3400 over the next few days, then there’s a good chance that sterling will continue to make gains versus the dollar. Below here there’s some support around 1.3200. This is a level that could be revisited if the dollar strengthens against the euro and the EURUSD breaks convincingly below 1.1800. 

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Posted by David Morrison

Category: PM Bulletin


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