Quid pro quo quandary
Today's news headlines:
- 'UK may need rate cuts even if it avoids no-deal, Saunders says’. Renowned Bank of England hawk, Michael Saunders, has argued future monetary policy could go either way as Brexit uncertainties are likely to continue to weigh on the UK economy, even in the case of a smooth Brexit. He stressed that the uncertainty shouldn’t be a ‘recipe for policy inertia’ and that policymakers ought to be nimble, even if it includes a reversal once the outlook changes. (Bloomberg)
- ‘Whistleblower says White House tried to cover up Trump call’. Publication of a whistleblower’s complaint claims a sensitive phone call between US President Trump and Ukraine President Zelensky was covered up in a classified storage system in the White House. Trump allegedly asked the Ukraine President to investigate Joe Biden and his son’s business dealings. White House officials supposedly immediately intervened to cover-up the call, suggesting they knew the gravity of what had transpired. (Financial Times)
Stuck in a rut
The market outlook continues to dim each passing day, dragged lower by weakening economic fundamentals and persistent political risk. Starting with the US, the whistleblower releases have plunged Donald Trump into a very dangerous situation. At this early stage of the story, it seems the President had genuinely believed his transparency would reveal his innocence, but quite the opposite has happened. The Ukraine quid pro quo may only be the tip of the iceberg and could prove to be a major distraction from the upcoming trade talks with China.
Looking at the EU, just this morning, another series of disappointing inflationary and consumer spending data was released. Meanwhile, the European Central Bank seems to be showing signs of internal discord, as Sabine Lautenschläger quits based on the ECB’s latest stimulus and Philip Lane says there is plenty of room to go further.
In the UK, a member of the Bank of England’s Monetary Policy Committee has come out and said what we have suggested over the past several weeks. Michael Saunders, who admitted he isn’t a fan of negative interest rate policies, said: ‘If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in bank rate would be down rather than up.’
Bottom line: Just to put into perspective how market participants are positioned, the below shows the number of Futures and Options contracts taken out by speculative financial institutions. It shows a net position, which reports the greater of long or short contracts in the market. Net long implies markets anticipate continued strength or additional appreciation of said currency. Net short is the opposite; the currency is expected to remain weak or depreciate further.
Sterling sold off on the London open amid dovish remarks from Bank of England policymaker Saunders. The pair dipped below the 1.23 level while the trade-weighted Sterling Index fell below its 100-daily moving average. Meanwhile, the Dollar Index climbed closer to multi-year highs. The pair has since found support at 1.2271 but is likely to test this level again throughout the day.
This morning, Sterling’s sell-off and a flat Euro have seen the pair to dip comfortably below the 1.13 barrier—a key level that has provided significant support and resistance throughout September. With a stronger Dollar affecting both the Euro and the Pound, the net outcome for GBP/EUR remains uncertain, and the pair may end up trading flatter throughout the day than their component parts against the Dollar.
Overnight, the pair dipped to fresh year-to-date lows of 1.0905 before rebounding in the London open. This afternoon, US consumer data may cause the pair to test the new low, especially since this morning’s European economic data disappointed. The 1.10 level that was traded earlier in the week certainly seems far away.
All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.