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A delicate balance of risks

​​​​​​Today's news headlines:

  • ‘China warns about “unwavering resolve” to fight US “bullying”’. China could retaliate against the US blacklisting of Huawei as Donald Trump moves to block the technology giant from doing business with American companies. (Bloomberg)
  • ‘Bank of England warns investment will suffer under no-deal Brexit’. BoE policymaker Ben Broadbent said investment projects in Britain would be placed on hold or shelved under a no-deal Brexit, weakening economic growth in the future. (The Guardian)

Under the hood

When considering Sterling valuation, it’s easy to get caught up in the latest Brexit shambles and ignore the underlying fundamentals, leading to underappreciation of the delicate balance of risks facing the Bank of England’s Monetary Policy Committee. If we go by year-on-year consumer price inflation, we have been above the BoE’s 2.0% inflation target since early 2017, having only edged under it in Q1 of 2019. The employment backdrop continues to tighten, traditionally stubborn wages are beginning to rise, and so-called ‘slack’ in the economy is diminishing. All the while, Sterling has reached three-month trade-weighted lows and rising commodity prices—particularly oil, which has rallied 40% since the start of the year—are set to hit prices and weigh on productivity. That said, the unpredictable nature of the Brexit royal rumble precludes policy tightening to combat inflationary pressures.  Today at 9:30 there’s an inflation report hearing, and tomorrow a raft of inflation data will be released, including the Consumer Price Index (CPI), Retail Price Index (RPI), and House Price Index (HPI) which are all set to increase.

Bottom line: The Pound Index appeared to bottom after a 3% decline over two weeks. The inflation picture appears to argue for a rate increase despite the Brexit uncertainty. Unless the Monetary Policy Committee (MPC) attempts some misdirection to gain breathing space, it will be difficult to make a convincing argument for standing pat.

US moves to block business with Chinese companies

A solution to the US-China trade dispute is slipping further away as the US blacklists Chinese tech giant Huawei and fellow telecommunications company, ZTE Corp. The UK has signalled it could take a similar stance while Australia has already made its decision to implement the ban. With other nations around the world now included in Chinese trade issues, it seems ever more unlikely that tensions will subside any time soon. Traders continue the risk-off approach as the US Dollar Index continues to test year-to-date highs, while Treasury yields inch higher and US equities close lower. Risk currencies such as Sterling and the Euro continue to trade well below their 200 daily moving averages.

Bottom line: The US blacklists Chinese tech company Huawei, while other nations signal similar approach as another hurdle emerges in the growing US-China trade dispute. Risk currencies such as the Pound and Euro stick to monthly lows while the Dollar tests year-to-date highs.


The pair has firmly broken through February’s lows and after heavy trading this morning looks to be heading towards levels not seen since December/January. Risk-off sentiment resulting from an escalation in the China-US trade war will keep the Pound from moving higher out of its current trading range.


The Euro Index suffered overnight into this morning as markets digested comments by central banker Benoit Coeuré that the ECB will have to be more creative in policy to offset its inability to use interest rates to push inflation. The safe-haven appetite for the Dollar could continue to drive the pair lower into today.


The Euro has moved to a three-month high against the Pound as political turmoil continues to shape the path of Sterling; however, the pair could have bottomed out as it currently sits on the 200-day moving average, a key level of support.