You might think that the economic news might be slowing down this week after the week we have just had. Alas, that is not so; this week's forex market might be just as choppy with some critically important reports emanating from Japan, China, Europe, and the UK, in particular.
Due on Wednesday, US Retail Sales growth for October is anticipated to increase by 0.7%, the same as September's Retail Sales growth. However, with supply constraints potentially inspiring people to complete some Xmas shopping early, a surprise beat might be on the cards for this report.
Back over the Atlantic, the UK releases its CPI data for October. The YoY CPI for the UK currently stands at 3.1%, after edging down from 3.2% in September. Septembers CPI dip might be temporary, and several factors indicate that CPI could rise with Octobers data. Chief among them is the flow-on effect expected from the UK factory gate prices rise to 6.7% in September, from 6.0% in August.
On Thursday, it is Canada's turn to release CPI data. After Septembers data, Canada's inflation rate was running at an 18-year high of 4.4%. Market consensus is pointing toward a fifth straight increase in the CPI, to 4.6%, while TradingEconomics predicts an even more significant leap to 4.9%.
We end the week with Japan noting its CPI data for October. Sustainable price growth in Japanese consumer prices is in doubt moving forward. Last month, CPI hit 0.2%, after remaining below 0.0% since the latter half of 2020. However, Japanese businesses are largely absorbing the rise in their input costs, whether temporary or permanent, rather than passing them onto consumers.
Devising a strategy for trading the GBPUSD requires an intimate knowledge of the technical and fundamental variables that affect this fan favourite pair.
A perfect strategy is elusive for the GBPUSD, but a good or great strategy is within reach. Let's look at the technical and fundamental variables that will push and pull the GBPUSD this week and see what information we can fold into our decision making.
For an in-depth analysis of the technical perspective of the GBPUSD, my colleague has graciously prepared the following video. In the video, Anish Lal discusses the weekly view for GBPUSD and important touchstones for the pair.
The US is the first to deliver a significant report to the market. That being, the Monthly Treasury Statement (MTS) at midday, Monday (Canada Central Standard Time). The MTS typically wouldn't garner more than a moderate level of interest. This month the statement takes on a new gravitas as the US moves closer to reaching its government-mandated debt ceiling. Janet Yellen, US Treasury Secretary, has already begun warning Congress about the looming US debt ceiling. She has urged lawmakers to act (i.e., raise the ceiling) sooner than later to avoid a shutdown of Federal institutions, like what occurred in the past.
We might expect Yellen to use the MTS, which is set to report a budget deficit of USD 307 billion, to stress her previously made points. Apathy from lawmakers in this regard could be a bearish intimation for the USD.
The UK is next out of the gate, delivering its ILO Unemployment Rate report (July) on Tuesday morning. The Unemployment Rate is a broad indicator of the health of the UK economy. In July, the rate is expected to drop from 4.7% to 4.6%.
One problem with the report is that July is already a month and a half in the past. A lot can happen in six weeks, and thus more up-to-date reports should be considered in conjunction with the ILO Unemployment Rate report.
For one, I like to look at the British Retail Consortium (BRC) Retail Sales for August or Consumer Confidence indices. The Former example, released last week, indicated that retail sales grew 1.5% in August vs an expected 3.2% growth. The retail Sales miss may mean that the UK labour stats for July might not be as favourable as expected.
On the same day, but separated by a good fourteen hours, the US will release its Consumer Price Index (CPI) report. This CPI will be particularly interesting because of its enormous relevance to the US Federal Reserve and how it judges when it should taper its Asset Purchasing Program. The Fed has always maintained that the inflation pressure the country has seen in 2021 is transitory. Thus, the idea of tapering its spending has been put off for a great deal of time. If certain goods in the upcoming report retract in price, those that disagree with the Feds position on inflation might be convinced of its transitory nature.
The UK will be delivering its own Consumer Price Index report on Tuesday midnight/ Wednesday morning. Inflation in the UK is expected to arrive at 2.9%, above the 2% threshold desired by the Bank of England (BoE).
Talk emanating from the Old Lady suggests that interest rate rises will materialise much sooner than the previously scheduled late 2022. Although we won't hear from the BoE when the CPI report is released, much can be gleaned from the report that might indicate how a change in the BoE's position regarding rate rises.
Fast forward to Thursday, and we are now looking at the US Retail Sales report for August. This report should be of interest because of the huge disappointment the Non-farm payroll delivered a couple of weeks ago. Will Retail Sales take a similar path, falling far short of expectations, or will they beat the forecast and inject a little bit of optimism into the USD? Retails sales are expected to drop 0.7% for August so there is a bit of wiggle room for the actual value to report stronger than expected.
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Inflation is on everyone’s mind. Not a day goes by without Blomberg Television asking me, on one of the offices 43-inch screens right in my line of sight, if inflation across the major economies, seen thus far, is:
Inflation is not globally homogeneous, of course. Rather, it presents differently in different countries. So, with this in mind, let's review some inflation data from the major economies around the world. It will be prudent to examine the tone that the respective Central Banks around the world are projecting.
Inflation in the US hit 5.4% as of June 2021, its highest value in thirteen years. 5.4% may seem impressive, but don't be fooled. Accounting for the majority of inflation are massive increases in the price of vehicles (new, but mainly used) and fuel (both up ~45% since last year), as supply constraints affect car makers globally and fuel recovers from abnormally low prices in 2020. It is almost unfair to compare fuel prices of this year to that of last year.
Moving forward, now that fuel prices are stabilsed (somewhat), a question we can ask ourselves is how long the inflation of car prices is likely to last and what hurdles may still exist that are hampering these production lines?
Knowing the primary catalyst of inflation is vehicles and fuel, The Fed position on inflation appears rational.
The narrative from the US Federal Reserve is that the current bout of inflation is Transitory. As in, it is not likely to stick around for too long. Fed Chair Jerome Powell has had to reiterate that this is The Fed's position repeatedly during his public appearances.
Powell has done a good job in quelling hawkish sentiment for the most part. Albeit, an unavoidably hawkish announcement from The Fed came in June when it bought forward its estimate for when the next few rate hikes could occur. This announcement was taken as Hawkish because it contrasted so much with the typical messages coming from The Fed. After all, the rate hikes are still anticipated to be more than a year away.
Central Banks around the world are generally echoing the sentiment of The Fed. In that, they are playing it relatively safe and trying to avoid prematurely pulling stimulus or pulling back too aggressively.
However, ultimately, the tone from the other Central Banks are a touch more hawkish than The Fed. For example, the Bank of Canada (BoC) and the Bank of England (BoE) have already begun slowing their bond-buying programs by billions each week.
The Hawkish nature of the BOC and BoE is interesting because Canada and the UK are dealing with considerably lower inflation values. Speculatively, a few reasons for their respective tone might be:
- The BoE and BoC are viewing the current bout of inflation as permanent.
- The BoE and BoC are less confident in their ability to control an unwanted level of inflation.
- Or simply, global markets are far more sensitive to announcements coming out of The Fed, and thus an extra-conservative tone must be taken by Powell and Co. Comparatively, the tones of other Central Banks are then taken as Hawkish.
The markets are (possibly) set to be as choppy this week as much as they were last week. The choppiness could materialise in the Forex market as two major Central Banks of the world take the spotlight. On Tuesday, the US Central Bank will be evaluating their response to the pandemic before members of the Senate panel on Covid aid. On Wednesday, the BoE will update the market as to its evaluation of the British economy and its monetary policy.
In his first outing since lasts week's FOMC, Fed Chair Jerome Powell will (virtually) head to Capitol Hill to address Washington politicians on Tuesday. The topic of discussion will centre on "lessons learned" regarding the Feds response to the global pandemic and its economic consequences.
Investors are currently trying to parse fact from fiction regarding what they hear from the Fed and what the market reports. Of particular concern are contradictions between the Fed's outlook for inflation, the Fed's massive money printing regime, and the rise and subsequent fall in commodity prices.
Last week's FOMC only served to increase interest in Powell's public appearances. Last week's FOMC was notable for the Fed's change in 2021 inflation projections, as well as expected long-term inflationary pressure. For example, the Fed's 2021 inflation projections rose from 2.4% to 3.4%, while it now expects two interest rate hikes by the end of 2023.
A brief reprieve is granted the USD until Thursday when we can expect to see May Orders for Durable Goods, GDP annualised (Q1), as well as the Bank Stress Test report from the Federal Reserve System.
It will be interesting to see if the USD's bullish turn last week will continue when the markets open this Monday. Further, I wonder if Powell will be drawn on any topic outside the stated reason for his Senate testimony. If he can be drawn to speak on topics outside the scope of the meeting, the USD bullishness could easily be boosted or damped by Powell's next outing.
Great Britain's FOMC equivalent is due this Wednesday. We will learn about any impending changes to The Bank of England's (BoE) monetary policy and discover any change in its stance regarding the factors affecting the GB economy.
It is unlikely that significant changes will be announced to BoE monetary policy on Wednesday. Nor is it likely that the BoE will take a hard stance on the country's economic outlook. The BoE could easily use the uncertainty created by the Government prolonging the country's lockdown, as well as and the evolution of the Delta Covid variant in the country to avoid making any changes to its projections. But, anything that indicates that the BoE will deviate from its existing monetary policy, or outlook in any economic sector will be carefully watched by the market.
1 GBP is currently trading at ~155 JPY, which is an important touchstone for the pair. The GBPJPY last touched (and notably rejected) this level in December of 2017. Before this, a period of consolidation occurred just above this price level in early 2016, before dramatically breaking down to its lowest point in the twenty-tens.
An important question to ask is: Where is the pair headed in the second half of 2021?
Will the pair bounce off this important touchstone and head back down to a sub 155 price level? Or, will the GBP penetrate past this point and head for a price level circa above 160?
An early indication of whether the pair bounces off this touchstone or penetrates it can be found in the smaller time frame charts. At the H4, the bulls show early promise, with some intense upwards pressure at the end of May. The intense upwards pressure occurred after a prolonged period of ranging. A slight drawdown has predictably occurred after this push. However, the pair appears to be moving to the upside again after shaking off the early profit takers.
However, it is far too early to make a call either way.
Let’s look at some events are may affect the trajectory of the pair in the near future. Two important events that I am keeping an eye on are the Tokyo Olympics and the health of the manufacturing sector in Great Britain.
The Japanese Government are marching staunchly toward an Olympics opening date of 23 July. But what happens if the Olympics are postponed again? I’m of two minds in this regard. The Yen might strengthen because investors will recognise that the country will be at less risk for another Covid outbreak without thousands of athletes flying into the country to compete. Or, the Yen might weaken, with ‘bad news’ begetting ‘bad news’.
The report hinting at the health of GB’s manufacturing sector is released in half a day. A solid value of 66.1 is expected, the same as last month, signaling that the sector is continuing to expand at a pace.
A spike in demand from China and the US was recorded in April, resulting in a record level of 61.1. I anticipate a slight tapering off in demand moving forward as the cost of inputs rise, and these costs filter into the sticker prices of goods. But this is might now appear until June or July PMI figures.
Time to turn your attention to the GBP.
This week is a monster week for the UK, with several very important reports set to be released. The most important reports to watch out for are the Claimant Count Rate, Gfk’s Consumer Confidence, and Retail Sales. The reports are delivered all throughout the week, so it will be a laborious week for the currency.
The GBP strengthened against the EUR and the USD at the end of last week. Will we see profit-taking before the reports begin dropping?
Here's an interesting juxtaposition. There are currently just over 25 Million Currently Infected Patients of Covid-19, with 2.4 million deaths*. However,
The point is, main street continues to grapple with the Coronavirus. However, if you were looking at the financial markets, you would've thought we were in one of the largest economic expansions in history.
So much so, Warren Buffet's favourite indicator is flashing signs of mania. Currently, the U.S equity market cap is more than double the GDP of the United States. The last time this happened was during the bubble of the 2000s.
That is a long, convoluted, and somewhat poor segue to the main point of this article. A lot has happened in the past couple of days, with many asset classes at significant highs during one of the worst pandemics in history – here's an article to summarize them.
As vaccinations pick up in the United Kingdom, alongside lockdown restrictions starting to show results in lower cases and deaths, investors have been flocking the pound as optimism for the United Kingdom's economy. It is important to note that 1.45 was the bid before Brexit was announced in 2015, making it a ripe target for bulls to take.
Vaccines have played a considerable part in the strengthening in confidence in the United Kingdom, helped by the fact that they did not join the European Union's vaccine effort. This enabled them to approve and administer vaccines at a faster rate than their European counterparts.
Nearing the same time last year, we had an unprecedented event occur – traders saw the price of WTI Crude Oil on their terminals go negative. A year of supply cuts, recovering demand, and recently a rise in tensions in the middle east has pushed the black Gold back to pre-pandemic levels.
After an influx of institutional attention dawning upon the digital currency, including the likes from Mastercard, JP Morgan, Morgan Stanley, and of course, Tesla, Bitcoin has reunited with bulls taking the price up to just under $50,000 per Bitcoin. To note, Around the end of November last year, we saw Bitcoin at around $20,000.
The S&P 500 has closed at an all-time high, touching 3,950 in futures trading. The index is up 7% year to date. If we lived in an ordinary world, all-time highs in the equity markets would be the headline of the day.
However, it seems like stocks are too boring nowadays, and everyone wants to know which altcoin is next to return 1000x. However, many companies in the index are producing blowout or at least better than expected earnings. Considering the macro-environment we are currently living in, is quite an achievement.
I had concerns about the notion that investors were considering Gold's valuation – not something you want to be talked about in a safe-haven asset. I believe a safe-haven asset should be there to ballast your portfolio in times of risk-off periods, meaning investors should be able to flock to it / rely on it to hold their portfolio in steady shape.
Gold's steady decline eases my concerns, with Gold trading at around $1,816 an ounce, way off its $2,000 highs. We can see a continuation of the trend should see prices around the $1,700 - $1,750 level.
Markets are frothy – stay safe, and trade safe.
*For you tinfoil hats-wearers out there, I will entertain you by including the fact that there are up to 650,000 deaths due to the flu each year. Take that what you will
Hello traders! This week ahead, we have many events that directly affect significant currencies such as the GBP, USD, the NZD, and the Euro. Traders should be aware of these critical events not to be whipsawed by the market. Here is your week ahead
UK Inflation dropped sharply to 0.2% in August, as stated last Wednesday, primarily due to the governments' "eat out to help out" scheme, pushing restaurant and café prices lower. After July's higher CPI figures, this conveyed the strong influence the "eat out to help out" scheme had on meal prices. The report explicitly talks about Inflation. However, implicitly talks about what the UK's treasury economic outlook is. A dovish tone may send the GBP against the US lower this week ahead.
We can't seem to escape Jerrome Powell, can we? Dubbed as the Reserve Bank of the World, the Federal Reserve of the United States' economic outlook and changes in policies directly affects traders' and investors' sentiment. It is without saying, traders and investors should be looking at these speeches this week ahead like a hawk to examine any change in Powell's tone about the economy. A more than expected dovish tone should push the USD higher against major currencies, vice versa.
Similar to the Inflation report hearing, Governor Bailey's speech will set the tone for the future of the UK's economy. However, what traders should be looking out for is whether Governor Bailey will give any hints on implementing negative rates in the UK. If he does, this would be a contrast to his position a couple of months ago, which could significantly see the Cable drop.
Australia has had a fierce battle with the Coronavirus. After having initial success with battling the Coronavirus without a strict lockdown, a massive spike in Melbourne, Victoria, has caused a setback of setbacks. A trans-Tasman bubble touted to be around mid this year has been pushed back to at least March 2021. Conditions are better now in Victoria, with the state reporting its lowest increase in Coronavirus cases in three months of 28. This is, in contrast, to triple-digit growth a month ago. With National Australia Bank (NAB) posting an increase of online retail sales of 62.6%, analysts predict a rise in retail sales from 3.2% the previous month. This may provide a push for the Australian dollar higher this week ahead.
New Zealand has been relatively prosperous in controlling the Coronavirus in comparison to other countries. However, that success has come at a brutal economic cost. New Zealand has suffered a 12.2% drop in GDP, higher than Australia, and the OECD average of -7% and -10.6%. With the market pricing in a 72% probability of a rate cut next year (Source: Bloomberg), a rate cut this early will send the New Zealand dollar spiraling downward. However, market consensus predicts that rates will stay the same at 0.25%. All eyes will be on Adrian Orr, which may give a better indication for the timeline of negative rates in New Zealand.
Just some personal perspective. There has been some speculation that the reason why the RBNZ has not implemented negative rates as of yet is to get banks to get their systems ready and bee prepared when negative rates do come. Furthermore, evidence has been shown in mortgage rates. Or more, the duration of low-interest mortgage periods. A couple of months ago, banks would offer 2.55% mortgage rates for six months. However, now, banks are only offering the same quality for one year. This suggests that they are trying to lock borrowers in these rates for a more extended period to minimize remortgages' wave once negative rates come in early 2021.
Europe has faired well regarding the collaboration between the countries regarding the EU's reaction to the Coronavirus in terms of fiscal and monetary policy. With that said, individual states have had different outcomes when it comes to the Coronavirus. Pair that with countries such as Greece and Italy facing economic distress before the Coronavirus, and you have a mixed bag when it reaches the individual countries' future. PMI's measure bearish/bullish sentiment for manufacturing. A figure above 50 signals expansion, while a figure below 50 shows contraction. Consensus state that the UK is set to release a PMI of 56. While still expanding, expansion is less than in the previous month when it was 58.8. Europe is set to release a PMI of 51.7, slightly lower than the 51.9 the last month. Germany is set to release a PMI 54.2, marginally lower than the 54.4 of the previous month.
Busy week ahead as we continue to tackle the Coronavirus around the world. Stay Safe, Trade Safe.
The pound against the US Dollar has returned 11.4% since its March lows. As well all know, a lot has happened since March. But what has not come to fruition is the Brexit talks. As the transition deadline for the UK to leave the EU approaches, Brexit talks have suddenly come back into the spotlight. However, Prime Minister Boris Johnson has thrown a wrench in the Brexit negotiations, threatening to break international law by passing local legislation to override certain parts of the Brexit deal.
The pound has been extremely volatile to these negotiations and developments with the Coronavirus. Yesterday, the Bank of England held interest rates at 0.1%, alongside stating that they explored how negative rates might be implemented. The pound dropped 0.6% against the US dollar, touching 1.28663. Petr Krapta, currency strategist at ING, stated that “they were exploring how negative bank rates could be implemented effectively, should the outlook for inflation and output warrant it at some point.
JP Morgan analysts weren’t too excited by the BoE’s announcement, stating that “there was little to be gained from taking action today” and that “should it need to react at a later date, the Bank will benefit from a little extra firepower left at its disposal having not wasted it today”
Brexit – or what doesn’t happen with Brexit. Currently, the EU has given the government until the end of the month to scrap the law they had proposed, or face legal action. Furthermore, they have till December to exit the EU properly as their transition period ends. These two factors have pushed the price of betting against the pound has skyrocketed. Therefore, being bullish on the pound has become cheap. Positive sentiment regarding a softer Brexit and progress on negotiations should push the pound higher.
Second factor: Of course, the Coronavirus. If the pandemic levels off, and economic damage is not as bad as it seems, the BoE may not implement negative rates and may push the pound higher.
Currently, the markets have not priced in the effect of negative rates. However, that may change as we get closer to crucial Brexit deadlines.
The pound is down 2% against the U.S dollar in the past couple of days, on growing prospects that the United Kingdom will leave the European Union without a trade agreement.
Brexit talks are set to continue this week, with UK's Prime Minister Boris Johnson playing hardball with European Officials. He has imposed a October 15 deadline, to which he plans to quit Brexit talks if no deal is reached.
The pounds have mostly forgotten Brexit, with the Coronavirus pandemic guiding everyone's attention away from the non-completion of Brexit.
Seema Shah, Portfolio manager at Principal Global Investors, stated that headlines over the weekend were a "timely reminder that, while the markets have been distracted by the UK's struggle to rejuvenate the economy, Brexit negotiations have quietly been going nowhere."
The main issues include competition, fisheries, and solving disputes.
Further downwards pressure came from the revelation of the UK government planning to release legislation that would override critical parts of the withdrawal agreement – notably the deal that would undermine the agreement that Boris Johnson signed last year to avoid a return to a hard border.
The pound has been rallying since its March lows, up 14.13%. However, it has underperformed compared to its peers. For example, the Australian dollar has rallied 31% since its March lows.
The main issue for the pound comes from its appreciation, not discounting Brexit talks. As headlines start to creep up about Brexit near Boris' October 15 date, the pound's volatility will increase. Petr Krapta, a currency strategist at ING bank, stated that "the Brexit head is back on and sterling is, in our view, unprepared." This comes at a time when the UK's grip on the Coronavirus continues to slip, with daily cases spiking, recording the highest number of daily Coronavirus cases since May.