'As long as policy spread shifts in favor of Fed against BoE, Cable will remain vulnerable' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXStreet

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

Do you believe that the recent disappointing data coming from the UK could convince the MPC to move the first rate hike further into 2015?

The Pound's pullback from mid-year highs has tracked a slide in various measures of BOE policy bets, reflecting moderation of investors' rate hike expectations. Indeed, Sterling has noticeably lagged the other majors amid the anti-USD reversal of recent weeks. Leading survey data suggest momentum is fading, which may be further amplified as the Eurozone - an important cross-border market for the UK - flirts with recession. On balance, that is likely to make a BOE rate hike more distant, which ultimately translates into GBP weakness against those currencies ahead of the UK in the policy tightening cycle (US, New Zealand).

Do you expect China's housing market to crash at some point? How would it impact global growth?

Murky credit market dynamics in the PRC make nailing down the probability of a housing market crash difficult. With that said, China is certainly slowing, which bodes ill for Asia as a region as well as global growth at large. In this sense, the question is more about velocity than direction: China-geared currencies like AUD and NZD look vulnerable in any case, but are likely to fall faster if there is a crash as opposed to an orderly deceleration.

Do you expect oil prices to continue dropping in the nearest future? What consequences could that have? What should OPEC do to stop the decline?

Deepening fears of global slowdown are a clear negative catalyst for cycle-sensitive commodities like crude oil. The structural advance of the US Dollar that is likely to resume in 2015 (if not sooner) on the back of Fed policy normalization is also a headwind considering crude is price in terms of the greenback. Soft oil prices are likely to bear down on inflation, which may prove particularly problematic for countries and regions already on the brink of slipping into negative price growth territory. Most significantly, this may herald further stimulus expansion in the Eurozone, weighing on the Euro. As for OPEC, it is not clear that they intend to fight the decline.

Is the Fed now better positioned than BoE as the bank that will hike rates first? In this framework, where do you see the floor in GBP/USD as the pair lost the 1.6100 area earlier this week?

GBPUSD doesn't have a pre-determined "floor". As long as the policy spread continues to shift in favor of the Fed relative to the BOE, Cable will remain vulnerable. The UK is far more sensitive to the dismal state of Continental Europe than is the US, which largely stands or falls on its own merits. With that in mind, the Fed may indeed precede the BOE in tightening. Key support is at 1.5950, with a break below that exposing 1.5820 as the next major hurdle

EUR/USD bounced at 1.2500 last week but the pair's recovery failed around 1.2800; do you see the pair extending decline below 1.25 and even reaching the 1.20 area?

The Euro has been aggressively sold over recent weeks and probably has more room to recover considering a further expansion of ECB stimulus is unlikely in the near term. We're yet to learn the extent of the central bank's ABS and covered bonds purchases while another TLTRO operation is pending in December. That means the Euro may not see the emergence of an overtly negative independent catalyst in the near term, opening the door for a larger bounce. A weekly close above 1.2850 would open the door for a test of the 1.3100 figure.