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– GBP pares gains amid spike in geopolitical tensions.
– Charts tip post-referendum high for GBP/EUR ahead.
– But U.S.-Iran tensions set to dominate FX this week.
– Brexit bill could clear parliamentary hurdle this week.
– EUR to take cues from USD, German economic data.
The Pound pared gains over the Euro early in the New Year although it still closed the week higher against the single currency on Friday and some technical analysts have said Sterling could now target levels not seen since shortly after the Brexit referendum.
Sterling was on the back foot from moment one in the New Year, although the initial move lower came without any obvious catalyst and in the wake of strong gains earlier in the week. But the downward correction in the Pound-to-Euro rate was egged on Friday by a stronger single currency, with the Euro-to-Dollar rate rising in the European session after potentially having benefited from weakness in emerging markets. The Euro was repeatedly sold last year in order to fund bets on emerging world currencies.
The Pound-to-Euro rate still closed the week 0.2% higher even after the soft finish and technical analysts at Commerzbank have suggested that a break above the exchange rate’s recent high around 1.2080 could now be achievable in the short-term. The told clients to buy the Pound upon any retreat to 1.1702 and to add to the position if the markets reaches 1.1661.
Above: Pound-to-Euro rate shown at 4-hour intervals.
“Our bias within these two limits is neutral but near term while capped by the 5 month downtrend we will err on the bearish side and allow for another failure and possible retest of the .8239 recent low,” says Karen Jones, head of technical analysis at Commerzbank, referring to the inverse of GBP/EUR.
A EUR/GBP rate of 0.8239 would mean a Pound-to-Euro rate of 1.2137, which is above the recent peak around 1.2080 and would be the highest level seen by Sterling against the Euro since June 29, 2016 – barely more than a week after the Brexit referendum.
Jones says the EUR/GBP rate will remain offered below the 55-day moving-average of 0.8587, which means the Pound-to-Euro rate is expected to retain an upside bias above 1.1645. But she’s told clients to walk away from their bets on Sterling if the exchange rate happens to fall below 1.1627.
“EUR/GBP at the end of last year spiked down to but recovered from the 55 quarter moving average at .8226, but the rebound has so far been capped by the 5 month downtrend at .8596,” Jones writes in a briefing to clients.
Above: Pound-to-Euro rate shown at weekly intervals.
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Pound Sterling: What to Watch
Pound Sterling softened against both the Euro and Dollar heading into the weekend as investors responded to an admission by President Donald Trump that U.S. forces were responsible for the killing of a senior Iranian military commander in Iraq, stoking tensions between the two rivals that are likely to again set the agenda in currency markets early in the new week.
Tensions were already rising between the U.S. and Iran after the White House said the U.S. was responsible for an earlier missile attack on an Iran-backed militant group in Iraq, although the death of targeting of General Qassem Soleimani earlier in the week has exacerbated the fued. And President Trump may now have upped the stakes again when saying via his Twitter feed late Saturday the U.S. has preselected 52 sites inside Iran for attack in the event that any of its bases or personnel in Iraq or elsewhere are targeted by Iran-enabled forces.
Investors are unlikely to welcome the hawkish White House rhetoric, which could see risk assets remain on the back foot Monday and safe-havens continue to outperform. That would benefit the Dollar against all currencies other than the Japanese Yen and Swiss Franc but it also provide support to the Euro in the short-term if it forces more international investors out of emerging markets. In that environment the now-slow-moving domestic story could easily fall by the wayside for Sterling.
Monday sees the IHS Markit final services PMI for December released at 09:30 and consensus is for the earlier ‘flash’ estimate of 49.0 to be revised higher to 49.1, although risk might be to the downside given that both the construction and manufacturing surveys have already surprised on the downside despite markets also looking for upward revisions there too.
“Figures covering the pre-election period are affected by high political uncertainty, so the poor PMIs for December shouldn’t cause too much concern,” says Andrew Wishart at Capital Economics. “The first “clean” data for the post-election period. It is in these we need to see some improvement in order to confirm a “Boris bounce”. If that doesn’t happen, expect interest rates to be cut in the following months.”
Tuesday sees the Withdrawal Agreement Bill back before parliament for the ‘committee stage’ before the whole of House, which could take until the end of Wednesday, while Lords amendments and the Third Reading of the bill are expected to take place Thursday. The bill is the legislative vehicle through which the withdrawal agreement is brought into force.
Prime Minister Boris Johnson’s withdrawal bill is widely expected to become law given the scale of the Conservative majority so the event itself is seen by analysts as unlikely to move the Pound, which will leave Sterling to take its cues from developments in the international arena and on the charts.
That being said, Johnson will meet European Commission chief Ursula Von der Leyen in Downing Street on Wednesday as markets wait to hear if a possible February visit to the U.S. and meeting with President Donald Trump will be confirmed. Senior Tories have been calling for the government to waste no time in starting parallel trade negotiations with the U.S. and Foreign Secretary Dominic Raab is set to meet Secretary of State Mike Pompeo in London Thursday, although that meeting may now be overshadowed by the State Department’s ire over the UK’s response to recent events in Iraq, which has echoed that of France and Germany.
“Three and a half years after the EU membership referendum, the UK will finally leave the EU in 4 weeks’ time,” says Jane Foely, head of FX strategy at Rabobank. “The tone and the pace of the talks between the UK and the EU will be instrumental for guiding GBP in the months ahead and we see ample scope for GBP/USD to dip back to the 1.28 area as politicians on both sides lay out their positions. If an appropriate deal is successfully negotiated it is possible that GBP/USD could trade in a 1.35-1.40 range in 2021. That said, there is a lot of ground to be covered before this becomes a realistic prospect.”
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The Euro: What to Watch
Europe’s single currency advanced on the Dollar and Pound during the European session Friday but still close the week a fraction lower against both, although the outlook for the week ahead is uncertain.
The Euro was borrowed and sold frequently last year in order to fund wagers on emerging market currencies, which have all cratered ever since the killing of Iran’s General General Qassem Soleimani, so it could benefit intermittently from weakness in the developing world if investors have to buy back the single currency in order to exit their exotic trades. And those emerging market currencies, not to mention other risk assets, might not fare too well on Monday when markets wake to the latest threats from the U.S. against Iran.
“The Japanese yen should once again outperform – especially against those risk-sensitive currencies directly exposed to oil exports via the Straits of Hormuz, i.e. the Korean won and the Indian rupee. Notably EUR/USD has shown very little correlation with world equities over recent months and, on balance, we would favour higher USD yields and US near energy independence keeping EUR/USD gently offered,” says Chris Turner, head of strategy at ING.
Fresh geopolitical tensions have prompted fears of a conflict with Iran in the Gulf and thrown the Dollar a lifeline because previously it was being crushed by jubilation over Trump’s claim that the much-vaunted but always-elusive ‘phase one deal’ to end the trade war with China will be signed at the White House on January 15. That had fueled an increase in so-called risk currencies as well as the Euro, although economic data due out of Europe will also have an impact on the Euro-to-Dollar rate in the week ahead.
Key items on the economic docket include Eurozone inflation figures for December as well as German factory orders and industrial production numbers for November. With Europe’s most recent and ongoing bout of economic weakness having its roots in the industrial sector of the continent’s largest economy, Wednesday and Thursday’s figures will be watched closely by the market for signs of a turnaround. Especially after China’s manufacturing PMI indices were shown stabilising for the month of December, suggesting the worst of the global industrial sector’s woes may now be behind it.
Markets are looking for Eurozone inflation to rise from 1% to 1.3% for the month of December and for the core rate of inflation, which excludes food and energy items from the goods basket, to hold steady at 1.3%.
The numbers are unlikely to cause any harm to the Euro although the European Central Bank (ECB) is seen as unlikely to lift its interest rate any time soon whatever the economic and inflationary weather so the data might not do much positive for the single currency either. German factory orders are expected to have risen 0.3% in November after declining -0.4% in October while industrial production is seen rising 0.9%, which would partially reverse a 1.7% decline from the previous month. The numbers will need to beat market expectations in order to have any hope of engineering and upturn in the Euro-to-Dollar rate.
“The greenback remains a well-functioning safe haven for global investors when geopolitical risks are involved. When the bombs fall, investors push into the dollar,” says Ulrich Leuchtmann, head of FX strategy at Commerzbank. “It is therefore not surprising that, in light of the news of US air strikes on Iran, the Dollar Index (DXY) is rising and marching towards 97.00 again, and that EUR-USD is relinquishing most of its gains from the end of 2019.”
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