Sterling stabilises on surprisingly upbeat news

• USD stronger but oil price rise and GDP could change that
• Sterling stabilises on surprisingly upbeat news
• Greek demand and unemployment make EUR shudder

It is becoming clearer that the nonsense talked about the decline and fall of the post-Brexit-vote UK is not coming to pass. Data throughout last week showed Britain is remarkably buoyant in spite of the vote to leave the EU and in spite of the dire warnings from the ‘experts’. So the Pound has found its feet and is performing quite well, albeit near the very low end of its trading ranges. Sterling is still around 3-year lows against most currencies and near a 30-year low against the ridiculously ebullient USD. So it isn’t out of the woods but it is taking a breather. The next direction of travel is uncertain though. Is this the bottom of the fall or is there more to come? No one can answer that right now and for goodness sake, don’t ask the ‘experts’. This week is light on UK data other than mortgage lending data and the 2nd estimate of Britain’s Q2 economic growth rate. If that is anything above 2.2% as an annualised figure, GBP is ripe for a recovery. Maybe all the precious metals being brought back from Rio will help the balance of payments.
 
The US Dollar is the currency ‘de l'année’; hitting, as it has, a 30-year zenith against the Pound and staying very strong against the Euro, the Yen et al.  Weak commodities and safe haven buying by investors remain the major drivers of this strength but the generally improving state of the US economy is helping somewhat. The markets are also hankering for more news on the timing of America’s next interest rate hike and the Federal Reserve Chair; Janet Yellen may provide some insight on that when she speaks at the Jackson Hole Policy Symposium on Friday. Friday will also bring the second estimate of US economic growth for Q2 but there is a feeling that may be downgraded a tad from the first calculations. The strength of the USD leaves it vulnerable to that kind of negative data, so be prepared.
 
The Dollar is also vulnerable to the price of oil recovering and comments from OPEC last week have caused the most impressive reduction in ‘short’ oil positions in history. In other terms, traders are reducing their bets on the oil price falling in record numbers. That ought to cause an oil price rise and that will weaken the USD because oil is traded in Dollars and a stronger asset creates room for the currency in which that asset is traded to weaken.
 
In Europe, this week’s big data comes in the form of business and consumer confidence indices as well as German economic growth data. It is unlikely any of this will have a major impact but the Euro is under a little pressure this morning after Greek unemployment figures showed the country is not out of the woods yet. Greece is also pressing again for the reparation monies they are still owed after WWII. Tension within Europe is palpable.
 
New Zealand’s big news for the week will be the trade balance data released late on Tuesday (UK time). There are concerns that this will reflect a return to deficit as imports rise. The recent RBNZ rate cut can only exacerbate that over the coming months and a strong NZD damages exports. 
 
And the GREAT British Olympics squad will be heading home today replete with 67 medals and 2nd place on the leader board ahead of China and …well everyone other than America obviously. Well done Brazil. That was a game borne out of adversity and run in the midst of a recession and, despite a few empty seats, it was impressive. And what a showcase for Rio. I suspect tourism may be the saviour of the nation’s economy. I hope it is.
 

Joke

Donald Trump is elected President and, on his first night in the White House, he is visited by the ghost of George Washington. Trump says, “So what can I do to best serve the United States?”
“Never tell a lie” is the response.
Trump says, “I think it’s a bit too late for that”, and George Washington vanishes.
The next night, he is visited by the ghost of Thomas Jefferson. He asks Jefferson the same question and the response is, “Listen to the people.”
“I don’t think that would help”, says Trump and Jefferson disappears.
On night three, the ghost of Abraham Lincoln appears to Trump. “What can I do to best serve the United States?” asks Trump.
Abe thinks for a moment before saying, “Have you been to the theatre lately?”
  

AUD

The improved UK data – at odds with the predictions of a post-Brexit decline – has boosted the Pound a little. The GBP-AUD exchange rate is 5 cents higher this morning than it was at the bottom of last week’s trading. That is also partly to do with an expectation of higher US interest rates before the year end in America. That would make the relative yield advantage of the Aussie Dollar slightly less attractive and this shift in exchange rate is a rebalancing; no more and no less. Based on recent data, it is unlikely the Reserve Bank of Australia will be seeking further interest rate cuts in the near term but never say never on these things. However, the strong Aussie Dollar will damage exports and increase domestic inflation, so there is scope for the Aussie Dollar to weaken in the weeks and months ahead. As long as Sterling can command better support, a recovery to AUD$1.77 is likely and perhaps a rally to AUD$1.82 could be on the cards. 


 

CAD

Last week’s retail sales data from the UK and Canada was a neat little encapsulation of the state of the two economies. British retail sales were up a surprisingly strong 1.4% in July; the month after the vote to leave the EU. Canada’s retail sales data disappointed with virtually zero growth and Canada’s inflation rate dropped. The GBP-CAD exchange rate rose 3 cents over the last few days and there was clear support for the Pound in the C$1.64 area. If that holds, a bounce to C$1.75 is probable but that has been variously support and resistance in the past 2 years. It will be hard for the Pound to break above there but, if it can, C$1.80 beckons.    

EUR

The Pound found some buyers after last week’s improved data. This was largely consumer related data and the UK economy relies heavily on retail and service activity for GDP growth, so that is a good thing. However, the Pound is finding it very hard to gain against the Euro. Hence the GBPEUR rate is still around the €1.16 level where it was testing the €1.31 level as recently as 23rd June. If Sterling is to mount a recovery against the shared currency, it will have to hit €1.20 with momentum and it is hard to see what might cause that right now. On the flip side, Sterling is finding plenty of buyers around the €1.15 level and that may suggest this exchange rate is bottoming out. If €1.20 can be breached, €1.24 is the long term resistance line and therefore the medium term target. If €1.13 breaks though, there is not a lot to stop the Pound going well below the €1.10 level. 


 

NZD

The Sterling – NZ Dollar rate is finding GBP buyers at the same level as in mid-2013. That NZ$1.77 support is blatant when you look at the recent lows on this chart. Having dropped from NZ$2.20 to NZ$1.77 in 10 weeks, the Pound is well overdue a rally. The halfway house between these extremes is around NZ$1.9850 and NZ$2.00 will also provide a psychological barrier.  So, with forecasts for a poor trade deficit number this week and the Pound finding its feet to some degree, there is a likelihood of further rises in this currency pair.
 

USD

The ‘will they won’t they’ nature of the debate over the next US interest rate hike is clouding the picture somewhat. There is little doubt the US Federal Reserve would like to be raising their base rate but worries over the fragility of the global economy and nervousness that they could unsettle the unconvincing US recovery, have kept them away from the ‘Hike now’ button. We will know more when Fed Chair, Janet Yellen speaks on Friday and perhaps Friday’s US GDP growth data will shed some light on the timing of the next rate hike. Meanwhile the US Dollar is the strongest currency out there and Sterling is unable to push the GBPUSD rate much higher than its level of 30 years ago. However, UK data is surprisingly solid and there is a change the 2nd estimate of Q2 growth for the UK will be upgraded when that data is announced on Friday morning. It will be another volatile week for the GBPUSD rate but perhaps one that favours the Pound for a change.


 

EURUSD

With Dollar strength derived from low commodity prices, safe haven flows from investors and the relative strength of the US economy, there is little surprise the EUR-USD exchange rate is not rising but, oddly enough, it hasn’t declined much in recent months either. In fact, this pair levelled off in mid-2015 and has been in a narrow but well defined trading range since then. The top end of this range is now at $1.14 and the rising bottom of the range is around $1.10. However, there is absolutely no momentum in this pair, so further sideways trading is the most likely scenario unless the rising oil price weakens the USD and the Federal Reserve decides to keep the US base rate on hold for an even more extended period. Balance this against the problems the EU is facing in the disparity between the economies of member states and there is scope for volatility. We are just not seeing it yet. We will though, I am sure we will.