Last week ended with the U.K. pound left reeling from the battering it took on Thursday, after the BoE announced a base rate rise of 0.25%. It wasn’t that the highly anticipated interest rise was already priced in, it was the accompanying dovish, forward guidance narrative, issued by the deputy and the governor of the BoE, which caused the selloff, with EUR/GBP rising by circa 1.75% on the day and GBP/USD falling by 1.45%. The pound arrested its fall on Friday, partially due to a BoE deputy governor suggesting that other rate rises may be appropriate in 2018, contradicting the previous day’s statements. As traders are no doubt aware; its only with hindsight that we can pinpoint a precise time when a security or currency swings low, however, it’s generally after such an action and announcement, such as investors witnessed on Thursday, that swings then historically occur.
Whilst the U.K. base interest rise was expected, the USA FOMC were also expected to announce that the interest rate would remain unchanged at 1.25%, at the culmination of their meeting on Wednesday. The reaction of the dollar was benign, although the dollar has risen versus many of its peers over recent weeks, having seemingly recovered from reaching its recent lows since Trump became president. Versus yen, euro and sterling the U.S. dollar has made considerable gains in October, which may be accelerated if, at the end of the last FOMC meeting of the year in mid-December, the result is the announcement of a 0.25% rise, to 1.5% for the key interest rate.
The likelihood of the final of three rate rises for 2017 taking place in December, have risen considerably due to the latest NFP figures bouncing back to 261k for October, from the hurricane impacted negative job loss figure, initially recorded in September. Encouraging GDP growth, unemployment falling to a recent record low of 4.1%, allied to growth in the factory orders and ISM non-manufacturing figures, paint a picture of an economy well positioned to absorb an interest rate rises, in order to begin a program of normalization, which may see the key interest rate reach circa 3% in 2018. Any rate rises, plus the quantitative tightening suggested by the Fed, is likely to continue given that the new Fed chair Jerome Powell, who’ll replace Janet Yellen, is likely to continue the pathway already set in motion. As a consequence USD may rise considerably in 2018 versus its main peers, unless markets witness coordinated rate rises from other central banks, most notably the: BoE, BOJ and ECB.
A cursory, snapshot examination of the COT report published on Friday, reveals the following with regards to large/institutional traders position trading.
• Traders have remained net long euro, but scaled back their long positions.
• Traders have now changed to a marginal net long position in sterling.
• Traders have increased their net short position in yen.
• Traders have now changed to a marginal net short position on New Zealand’s dollar.
• Traders have reduced their not long position on Australia’s dollar.
• Traders have increased their net short position on the Swiss franc.
• Traders have increased their net long position on Gold.
• Traders have increased their net long position on the SPX.
Monday is a relatively quiet day for medium to high impact news events, with the majority of economic calendar news concerning Europe. Germany’s factory orders will be carefully monitored for any change, given the country’s position as the engine of manufacturing growth, at the heart of Europe and the Eurozone. Mr. Praet of the ECB will also give a talk in Frankfurt. From Switzerland we’ll receive the latest figures on CPI, which if they miss target could effect the Swiss franc’s safe haven appeal, as can the weekly sight deposit information concerning the franc. There’s a raft of Markit PMIs published in relation to the Eurozone on Monday for: France, Italy, Germany and the Eurozone as a wider area. New car registrations YoY and MoM in the U.K. will be carefully examined, given the nervousness with which investors are monitoring the Brexit situation.
