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Accendo’s Foreign Exchange Forecasts, Monday 18 September

Macro observations

After a week in which the Pound clawed back gains against peers on strikingly hawkish rhetoric from the Bank of England, it’s the turn of the central bank’s stateside counterparts to update the market, with many expecting a significant policy announcement.

But before the Fed takes the spotlight, the Bank of England Governor Mark Carney will address the IMF in Washington on Monday afternoon (4pm). Following on from last week’s meeting of the Monetary Policy Committee and unexpectedly hawkish comments from infamously dovish colleague Vlieghe that sent the Pound to its strongest level since the EU referendum against the US Dollar and a multi-month high against the Euro, will the Governor himself add further fuel to the Sterling fire?

Thereafter, the FOMC will take centre stage as Janet Yellen and the rest of the nine member strong rate-setting committee prepare to announce their long awaited balance sheet trimming.

Since the announcement of its Quantitative Easing (QE) programme in reaction to the ’07-’08 financial crisis and its subsequent tapering from ’13-’14, markets have continually wondered how long it would take for the Fed to end its current reinvestment programme, a programme which has seen the central bank’s assets swell to over $4.5 trillion.

This looks set to be outlined on Wednesday, with the eventual goal of reducing reinvestment to zero, while interest rates are expected to be thrown into the background; Fed fund futures currently allocating only a 3% chance that the Fed will hike rates on Wednesday, against a 47% chance of a December hike.

However, what the longer-term effects of this will be are still unknown. Whilst a bullish signal, since the first mention of balance sheet trimming back in March the US dollar has fallen by over 10%, and the continued tightening of policy through interest rate hikes has done little to stem that sell-off. Whether bond markets will react in a similar fashion to 2013’s ‘taper tantrum’ remains to be seen, however one thing we can be certain of is that this is will be an enormous step on the path of monetary policy normalisation. Will the greenback be jerked from its 2017 lull as a result?

While the central bank policymakers debate the future of US monetary policy, President Trump will be attending his first UN general assembly and addressing delegates on Tuesday. North Korea is likely to be the primary topic discussed by the President in New York, however other nations will be looking for clarification of perceived protectionism from the ‘America First’ President. For the most part, FX traders will be hoping for a balanced and poised address from Trump; a raucous, off the cuff affair could dent the US currency further.

On Friday, UK Prime Minister Theresa May will give her latest landmark speech on Brexit in Florence. Renowned for its contribution to European trade throughout the centuries, the choice of the Italian city is just the first indication of the importance of the speech.

However, while the PM hopes that her appearance in Italy will carry a similar poignancy to January’s Lancaster House speech, she may find herself undermined by her own cabinet. Foreign Secretary Boris Johnson’s Daily Telegraph article outlining his ‘Brexit vision’ has been viewed by many as a precursor for a leadership bid.

This is hardly the backdrop that May would have wanted for what is expected to be her most important Brexit speech yet, with many hoping that she will either announce the UK’s ambition for a transition period or concede and announce a firm figure for the UK’s exit bill in order to accelerate talks with the EU. Any attempt at concession could help keep the Sterling rally alive as traders embrace a constructive standpoint from the government, however a speech strong on rhetoric and weak on action (as per the PM’s early Brexit speeches) will likely do little to inspire confidence.

The final crescendo for FX markets this week will be the German Election (Sunday), with Angela Merkel widely expected to win her fourth term as Chancellor. Yet the election could be remembered for the performance of the lesser parties in German politics. Currently at the head of a grand coalition with her rival Martin Schulz, a strong showing from smaller parties could offer Merkel greater leeway to pursue more meaningful policy changes with less opposition.

Any surprise showing from Schulz could spark a pointed reaction in the Euro, while a strong showing for Merkel may rekindle the Euro’s phenomenal rally. Expect the political manoeuvring on Monday morning to add a little more excitement to proceedings following the closing of the vote.


Key data this week (Sign up here to receive our daily live macro-calendar)

Tuesday 19 September

Intl Economic Announcements
10:00    ZEW Surveys (DE & EZ)
13:30    Housing Starts, Building Permits, Import/Export Prices (US)

Wednesday 20 September

UK Economic Announcements
09:30    Retail Sales

Intl Economic Announcements
07:30     Producer Prices (DE)
15:00    Existing Home Sales (US)
15:30      Oil Inventories (US)
19:00    Fed Monetary Policy Decision (US)
19:30    Fed Press Conference (US)

Thursday 21 September

UK Economic Announcements
09:30    Home Loans, Public Sector Borrowing

Intl Economic Announcements
AM        BoJ Monetary Policy Decision (JP)
13:30      Jobless Claims, Philly Fed (US)
14:00    House Price Index (US)
15:00    Consumer Confidence (EZ)

Friday 22 September

UK Economic Announcements
11:00    CBI Trends

Intl Economic Announcements
07:45      GDP (FR)
8-9am   PMI Manufacturing & Services (EZ)
14:45     PMI Manufacturing & Services (US)
15:00    Michigan Consumer Sentiment (US)
18:00     Baker Hughes Rig Count (US)


GBP/USD (‘Cable’)

Technicals

  • Cable remains close to its highest level since 2016’s Brexit vote, although has paused following its best week since 2009
  • RSI and Stochastics both remain sharply overbought 
  • Momentum has dipped from its best level but remains sharply positive
  • Directional indicators continue to diverge bullishly

GBP/EUR


Technicals

  • Sterling has paused having rallied 3.8% last week to a 2-month high of €1.139
  • Stochastics and RSI both remain overbought but off best levels
  • Momentum at highest level since November 2016
  • Directional indicators converging bearishly

EUR/USD

Technicals

  • The Euro has rallied from rising lows support having fallen from its 33-month high of $1.209 traded earlier this month
  • RSI has bounced bullishly from its midpoint
  • Momentum recovers to positive after falling to zero for first time since August
  • Directional indicators diverging bullishly

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.

Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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