Fibogroup Market Analysis 2017

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The British pound is on its way to the $1.34 mark today after the latest interest rate decision and monetary speech Bank of England.

At 2.45pm (GMT) the British currency was trading at $1.3357 up from $1.3204 in yesterday’s close.

Although the BOE kept rates on hold this time round it was the following monetary speech which put a rocket under the pound and saw it crash through the $1.33 mark.

On the question of inflation the central bank noted that it was currently running at a higher than expected level and in the nearest future some action may be taken to tackle the problem which the market took as interest rate hikes,

“Some withdrawal of monetary stimulus is likely to be appropriate over the coming months" the bank noted.

The first rate rise since the global financial crisis may come sooner than investors think according to some, November looks like a good bet,

"If the economy continues to hold up, and there are clearer signs that wage growth is building, then the first hike could some somewhat earlier than we had previously envisaged, possibly as soon as the next meeting in November alongside the Inflation Report," noted Paul Hollingsworth, UK economist at Capital Economics

Some however are not convinced of any rate hikes in the nearest future on the back of low wage growth and the potential damage it would do to the UK population who are already feeling the pressure of less spending power,

The meagre wage growth we are seeing in spite of these trends is making it harder for the Bank of England to raise rates, especially as any rise will put yet more pressure on households who are already under strain due to a fall in their real earnings. Noted Yael Selfin, chief economist at KPMG

 

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The Australian dollar has held up remarkably well in the Asian trading session today considering the developments overnight in the Asian region.

North Korea once again fired a long-range missile over Japan and into the ocean which sent many Japanese people ducking for cover in fear of their lives.

When North Korea launched their previous missiles, the Aussie dollar sunk as investors exited riskier assets in favour of safer ones like gold or the US dollar but as we can see on the Chart the Australian dollar has found strong support as it has in the past 2 days at around the US79.80c mark.

If there is a strong condemnation from the US over North Korea’s missile launch such as Donald Trump threatening military action or even stronger sanctions than already in place ,the Australian dollar could fall back further to the US79.00c level where this is an even stronger support level which will be hard to break.

The currency has now formed a strong double top with the last top higher than the previous one which is a strong bullish sign.

As already mentioned, unless something drastic over North Korea happens from the US, the next stop for the Australian dollar is the previous top of US80.68c

 

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The British pound has succumbed to profit taking in today’s trading after rising nearly rising nearly 4c against its US counterpart over the past week and some predict that with possible rate hikes on the way there is room for more gains.

Inflation in the UK now sits at 2.9 percent and is well above the BOE’s target rate and it looks like they may have no choice but to lift interest rates before the end of the year.

"If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in bank rate might be as early as in the coming months." Said BoE policymaker Gertjan Vlieghe.

BOE Governor Mark Carney is is in Washington today and is due to give a speech on monetary policy at 16.00pm (GMT). Investors will focus on the governor’s words for any signs of future rate hikes which follows on from comments he made last week

If Carney fails to touch on the question of interest rates the pound may see a further pullback,

“Following the impressive sterling rally, any dovish comment by Carney is likely to weaken sterling more than hawkish comments would be able to support it at these current levels,” Commerzbank AG analyst Ulrich Leuchtmann wrote.

 

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The gold price has stabilized today after suffering 2 straight days of losses as the markets await a key Federal Reserve meeting in which the central bank is going to lay out its monetary policy strategy moving forward.

Investors expect the Fed will announce they will begin reducing the 3.7 trillion asset base which was built up because of the global financial crisis in 2008 to spur economic growth.

"Normally you would expect gold to suffer from a reduction of the balance sheet, as it benefited when it was increased," said Simona Gambarini, an analyst from Capital Economics.

"But as the Fed has been quite open about its intentions to make this happen, I don't think, unless it announces that it intends to reduce by a lot more than markets expect, that will happen." She added.

Gold has benefited immensely over the last few weeks on the back of heightened tensions between the US and North Korea over the latter’s missile program but for the time being it seems things have cooled down which may leave investors exiting gold for higher growth assets,

“With no increased provocation to speak of on the Korean Peninsula, investors are moving out of gold, the yen and U.S.Treasury’s in search for higher-yielding, more-risky assets,” said Richard Perry, market analyst at Hantec Markets.

“This move means that the technical positions on gold and the yen are on the brink of a significant change in outlook.” He added.

 

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The British pound jumped back above the $1.36 level earlier in the trading session today before pulling back after the release of better than expected data bolstered the case for a rate hike in the nearest future from the Bank of England.

At 1.19pm (GMT) the British currency was trading at $1.3540, up from $1.3509 in yesterday’s trading session.

The latest retail sales figures from the UK hit the market earlier today at 1 percent against analysts’ expectations for a figure of 0.2 percent and shows consumer confidence is on the rise

Many now predict that the path has been cleared for a rate hike from the BOE although they are advised to proceed with caution,

“Sterling has found a reason to move on the back of the news, having been directionless over the week so far. With non-food price inflation hitting multi-year highs, there is certainly plenty of rationale for [Bank of England Governor] Mark Carney to begin a gradual hiking process, but the limited reaction from sterling show that the market is still rather cautious,” said IG chief market analyst Chris Beauchamp.

An interest rate decision due out later today from the US Federal Reserve is likely to be the main driver of the pound as we head into the American trading session.

No changes in rates are expected from the Fed but the following statement from the central bank will be closely monitored for signs of the bank’s future movements regarding rate moves and should the market be expecting any hikes later in the year.

With inflation still running well under the Fed’s target rate, the chances of a dovish speech from Fed President Janet Yellen remains high which will likely further boost the pound,

"With tepid inflation, the dot plot for the longer term is more vulnerable to downward revisions and this could potentially weigh down the dollar," said Zhu Huani, market economist at Mizuho Bank.

 

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The gold price has continued to fall in today’s trading session after yesterday’s surprise announcement from the US Federal Reserve that a rate hike in December was a distinct possibility which left investors exiting most assets, including gold and moving into the US dollar.

Gold remained well supported in recent weeks as talk of military conflict grew between the US and North Korea and expectations that the Fed would hold off raising rates any further this year.

Fed president Janet Yellen in her following speech after the rate decision noted that the US economy is in good shape and a case for higher rates is justified

“The Fed’s monetary policy update sees investors flee from the non-yielding asset,” said analysts at Accendo Markets.

“The resultant stronger U.S. dollar puts a further dent into sentiment, increasing the relative price of the precious metal. While off overnight lows of $1,296 courtesy of 5-month intersecting support, overnight falling highs are continuing to pressure gold,” they added.

Gold is now at a key technical support level which is the double top that was formed in April and June. If the precious metal does manage to break down through this level it should find support at the $1.283 level although there is a risk that this may fail to hold

 

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As we wrote in yesterday’s technical report, Gold has managed to find support at the $1,290 level which are the double tops formed in the months of April and June. This is a significant event for the precious metal because a break down below this support level may have seen gold fall considerably further.

We don’t expect any big moves today and gold may test this key support level over the next few trading sessions before climbing higher and in turn keeping the bull trend intact. It seems as if the market has brushed aside the anticipated rate hike from the US Federal Reserve in December which is the main reason gold suffered substantial losses this week.

 

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The Euro has taken a hit in today’s trading session on the back of shock election results from the Eurozone that adds to the already existing political instability.

At 11.20am (GMT) the European currency was trading at $1.1859, down from $1.1961 in yesterday’s trading session.

Although German Chancellor Angela Merkel is expected to form a coalition and remain in government, it was the rise of the far right party that caught everybody off guard when the far right AFD party picked up 13.5 percent of the vote making it the first time such a party has entered German politics since 1949.

It follows on from a number of other European countries who have suffered the same fate which many blame on the flood of refugees entering Europe leaving the Eurozone barely coping,

"Merkel’s diminished authority and the rise of a party with links, and similar Eurosceptic views among other things, to UKIP and France’s National Front appears to be weighing on both the euro and the region’s indices," wrote Connor Campbell, an analyst at SpreadEx.

The Euro is likely to stay under pressure until Friday when retail sales figures from Germany hit the market along with CPI figures from the Eurozone.

If the CPI figures come in strongly investors may be willing to overlook the German election results and the Euro may continue its winning streak.

 

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The Australian dollar is down below the US79c mark and under further pressure today following on from yesterday’s heavy losses on the back of falling commodity prices and according to some, the outlook for the currency is pretty grim.

The Aussie has lost over US2c in the previous 5 trading sessions which was exasperated by the sudden mini collapse of iron ore, Australia’s biggest commodity, which has fallen from $80 in mid-august to around $63 today and is now officially in bear territory.

An asset is considered to be in a bear market if it loses 20 percent of its value in quick succession from a recent high.

Last month’s figures out of China released to the market recently were lower than expected, which has contributed to the fall in iron ore as the country is Australia’s main customer for the commodity.

“August activity and spending data suggested that the Chinese economy is starting to slow.” noted Caroline Bain, chief commodities economist at Capital Economics

“We expect the price of iron ore to fall further and to average just $55 a ton in the fourth quarter,” she added said.

Another factor which may put pressure on the Australian dollar in the medium term is the RBA’s inability to raise interest rates to keep up with the rest of the world which is currently tightening monetary policy.

According to Westpac analyst Bill Evans, the Australian central bank will need to keep rates on hold for the next few years until 2020 in the current environment.

He noted the following factors will keep the RBA’s hands tied on the question of rates,

“The RBA is forecasting 2 percent underlying inflation in 2017 and 2018, bottom of target band, to be followed by 2.5 percent in 2019,” and yet in reality, underlying inflation is currently running at 1.8 percent and the upcoming revised weights are likely to reduce annual underlying inflation by 0.2-0.3 percent.”Mr Evans said.

“Given the global lessons on the structural wages outlook, it seems unlikely that wages in Australia where spare capacity is higher than in these other developed economies will lift significantly even in the medium term,” he added.

 

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The Euro has come under pressure in recent days and now it seems its becoming technically vulnerable on the back of a head and shoulders pattern that has formed over the last month. Since hitting a peak which is the head at around $120.30 the currency has crashed down through the neckline (2nd line from the bottom on the chart) and this is a serious bearish signal. This may be a turning point for the Euro and we may be in for a serious reversal with the first resistance coming at the bottom line which as we can see was a previous support level.