FX weekly outlook - GBP manages to steal the show yet again

Friday, 19th February 2021 10:04 - by Rajan Dhall

Despite all the talk of negative rates from central bankers in the UK the pound has hit a level we have not seen since April 2018. The mass vaccination program and better than expected GDP reading sent GBP higher against most of its peers over the week. Although it's a bullish story it may cause havoc for exporters and FTSE 100 firms as customers may look for discounts elsewhere.

Next week we get earnings data from the UK as well as the latest unemployment figures. The current unemployment rate stands at 5.1% and if you compare that with figures we have seen recently from the likes of Australia (6.4%) and the US (6.3%) the UK is still performing well, but we still have the furlough scheme in place. Tomorrow we will see how our shopping habits have changed during the national lockdown as we get the retail sales figures for January. It is expected to come in at -2.5% vs last months reading of 0.3%. The market will also get the latest manufacturing and services purchasing managers index (PMI). This will be important as the ONS kept saying we had received a boost from pre-Brexit trade. Now we are over that saga it will be interesting to see if the outlook has changed from the survey results.

Moving on to BoE policymakers, Saunders said cutting interest rates below zero could well prove the best tool for the central bank under some future circumstances, but the BoE did not need to decide on this yet. This month the BoE gave banks six months to prepare for a possible decision to cut rates below zero. He then stated, “As to whether it’s desirable, whether it’s appropriate to achieve our remit to stabilise inflation, that would be a judgement to take at the time. It is not one we need to make yet,”.

Looking at the chart now the psychological 1.40 market is next up. Beyond that, 1.43 is next up this is the high back in April 2019. Currencies very rarely move with this amount of relentless force for this amount of time. The economic implications usually warrant some kind of correction. If that is to be the case the next support is at the purple horizontal line near 1.3836 and then the stronger zone below that stands at 1.3352.

Source: TradingView

The FOMC meeting minutes offered nothing new this week. The Powell and Co. reiterated that they are looking to meet their inflation and unemployment targets before committing to a change in policy. This also means that the mammoth QE/asset purchasing program will continue at its current pace.

One thing that has been interesting across the pond is the rise in yields. The US 10-year treasury yield has now risen for 3 weeks running. Since the low point in 2020 there has been a rise from 0.36% to 1.28% today. This indicates that within that time horizon money markets are pricing in rate rises but over the 5-year horizon the increase is much more modest. The spread between the two has risen 4.35% over the last week alone.

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Looking at the dollar index (DXY) chart, the seems to be a base pattern forming. There are now a few resistance levels to keep an eye on. Next up is the trendline marked on the chart. We are in close proximity of the zone but beyond that, the previous wave high could pose a problem too (91.60). The strongest resistance is at 92.18 it has been tested 3 times on this chart alone and it could be a big hurdle for the bulls to take out.

Source: TradingView

CAD/AUD/NZD are all playing the commodities bull market with good grace. All three of the currencies have been performing very well over the last few weeks and NZD is been pretty solid due to the way the government has handled the COVID-19 pandemic. Looking ahead it's hard to tell if the strong oil and copper price will keep NZD in the lead but the commodities trends have been great and if they manage to continue there is no suggestion the strength will abate.

Obviously, the respective central bankers in all three nations are trying to jawbone their currencies. At the moment it's not really working too well but the Australian dollar did not manage to take out the previous wave high this week. RBA Gov. Lowe announced an extension (worth AUD 100bn) of the bond purchasing programme, which will be kept at the current rate of AUD 5bn per week after it expires in April. Beyond that, we will need to wait for more information but I imagine there will be some attempt to quell the AUD strength.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.