Quiet markets as holiday season draws to a close

This Week's Highlights

• Quiet markets as holiday season draws to a close
• European data frighteningly poor but Friday's Inflation index is the key

FX Market Overview

Groucho Marks famously said he wouldn't want to be part of any club that would have him as a member and South Yorkshire Police and Crime Commissioner Shaun Wright; who is at the centre of the Rotherham abuse investigation, appears to be living that rule mas he quits the labour party which has been so critical of his shamelessness. I still can't equate this South Yorkshire Police Force which failed 1,400 vulnerable children who were systematically abuse but so publicly investigated one allegation against Sir Cliff Richard through a 7 officer raid on his house. Curious priorities!

As we near the end of the holiday season across Europe and as far as UK schools are concerned, the markets are reasonably quiet. That belies the turmoil going on in the political and geopolitical world and kind of ignores some of the economic data that is assailing us through the newswires.

For example, the Euro remains relatively flat in spite of a change of government in France, French unemployment at record highs (3.4 million out of work), French manufacturing sentiment still declining, German business and consumer confidence slumping etcetera etcetera.... Traders are quite closely focussed on tomorrow's inflation data because the ECB is not expected to move monetary policy next week unless that data is dire enough to suggest deflation is a real risk.

The Pound is pretty lacklustre as traders try to weigh up; amongst other things, the effect - if any - of a Scottish exit from the UK and the Bank of England's reticence when it comes to interest rate hikes. Business leaders are lining up on the pro and anti sides of the debate. The government is caught between pressing for the benefits of being inside a trading bloc and the hypocrisy of saying that whilst threatening exit from Europe.

In spite of alarmist reports of a Russian invasion of Ukraine, the US Dollar is also sanguine but the US data has been a little more positive. Tomorrow's consumer income and expenditure data will be closely watched, as were the business and consumer sentiment indices today this afternoon brings the big data of the week. The 2nd estimate of US economic growth was expected to bring a small downgrade from the 1st calculation. 4% was expected to have been replaced by 3.9% or perhaps 3.8%. In the event, the number was 4.2% and still the US Dollar didn't strengthen.

Away from the markets, I absolutely loved the story about Ai Hin the Panda. The scientists working with Panda's think she may have faked a pregnancy because she saw how well the other expectant Pandas get looked after. So by mimicking the behaviour of other pregnant females, she got access to better accommodation, more bamboo, buns & fruit and other creature comforts. Top work Ai Hin. I think they underestimated your sneakiness.

Currency - GBP/Australian Dollar

Having spent much of the last 5 months trapped within a trading range roughly between A$1.774 and A$1.830, the Sterling – Australian Dollar exchange rate is sliding.  With both the RBA and BOE sitting on their hands for the time being this exchange rate has had little momentum in either direction. Things may be changing though. Australian capital expenditure has suffered as the mining sector has slowed down but we saw a solid rise in this component of economic activity in the 2nd quarter of the year. That has given the Australian dollar a boost at a time when Sterling is under pressure following a split vote in the bank of England.
Technically, GBPAUD declined from A$1.9181 in January to A$1.7739 on the 10th of April.  We have subsequently been range and are currently testing support at 1.7730. If that holds then we will see another swing back towards the top of this range but there is a real possibility of a drop to A$1.76.

Currency - GBP/Canadian Dollar

We saw a sharp increase in the Canadian trade balance in June, with the surplus more than doubling from the previous month with strong demand for Canadian exports.  The Bank of Canada has maintained a watching brief while Canadian Data has been rather directionless. On this side of the North Atlantic, two of the Bank of England Monetary Policy Committee voted to raise interest rates at their last meeting. This was the first time in over 3 years that the vote was anything other than unanimous. Understandably, that got tongues wagging. The speculation of an early interest rate hike should have strengthened the Pound. However, such is the fragility of the UK economic recovery that traders saw it as a negative and Sterling slipped a little. So the Sterling – Canadian Dollar rate is still in the trading pattern it has occupied for over the course of this year (1.81-1.855 or so).  Until or unless something substantial changes, use these ranges to make your plans.

Currency - GBP/Euro 

The Sterling – Euro exchange rate started correcting in mid-July, dropped sharply in early August and has been stabilising in this narrow range since then. There is an air of recovery in the chart though. Activity between Ukraine and Russia is worrying investors, as is the sharp deterioration in Eurozone data. The European Central bank is under pressure to reignite the economy and best are being cast as to when they will start that process. For now, the range is €1.2470 to €1.27 and it seems unlikely we will see a break out from that until or unless the ECB surprises the socks off us all. That isn't likely by the way

Currency - GBP/New Zealand Dollar

There is a gentle upward slope to the Sterling – NZ Dollar exchange rate but it is almost imperceptible. Currently the Pound is supported at 1.9380. That's both a Fibonacci retracement level and the 100 day moving average; jargon that really means a lot of traders will be lined up trying to trade at those levels. So those trying to buy Sterling should be copying them. Orders based on an interbank rate of 1.9400 make sense. Those trying to buy NZ Dollars should be targeting NZ$1.98 and maybe NZ$2.00 if they have more time on their hands.

Currency - GBP/US Dollar 

Oddly, when the announcement came today that Russia had moved troops into Ukraine, the US Dollar didn't strengthen. In days of yore, that would have caused a mass exodus out of anything related to Russia or the nearby Europe and into the safety of the US Dollar but not a bit of it today. Perhaps chartists were telling their traders not to buy the US Dollar below $1.66 because that is what the chart suggests. There are other technical tools which also highlight $1.66 and $1.6560 as solid support levels for the Pound and the Relative Strength Index at the bottom of this chart shows the Pound to be very oversold at these levels. We may see some recovery in Sterling in the days ahead or, at the very least, consolidation around the current levels but, if Sterling does capitulate and if traders wake up to the potential for escalation in Ukraine, we could see a dive to $1.63 or slightly lower as well.