FiboGroup Market Analysis 2018

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The British pound has continued on its winning ways in today’s trading session, breaking through the $1.42 level against its US counterpart after last week’s economic data justified the case for a rate hike in May.

Although rates were kept on hold by the Bank of England last week, 2 out of its 7 of its board members voted to increase rates which was against market expectations.

This may have been attributed to the wage figures that were also released last week which beat consensus and removes a significant barrier for the BOE to tighten monetary policy.

The transition agreement agreed to by the UK and the EU last week has also lent support to the pound but some say the market may be getting ahead of itself and that the sterling’s rise in recent weeks may be about to end.

There may be a little too much optimism over the transition deal brokered as the chances of something going wrong remain high while analysts at Barclays believe that the rate hike expected in May is already priced into the market which gives little reason to believe the pound will make further gains.

"Our expectations for near-term GBP appreciation materialized last week after the UK and the EU reached an agreement for a 21-month transition period, while higher wage growth solidified market expectations for a May BoE rate hike," says Hamish Pepper, a foreign exchange analyst with Barclays.

Accordingly, Barclays have revised their BoE call and now expect a 25bp rate hike in May 2018 and February 2019, broadly in line with market pricing.

"While we continue to envision some GBP appreciation over the forecast horizon, we see little impetus for further near-term Sterling gains and are neutral at current levels," says Pepper.

 

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The gold price has run into some stiff resistance today at around the $1,350 mark as it did in the middle of February and has pulled sharply lower bringing to an end 4 solid days of gains and some predict the fall today is only temporary and the chances of a longer rally are high.

A potential trade war between China and the USA has been the catalyst for gold’s recent run and although the war of words between the 2 countries has somewhat eased, there are plenty of other destabilizing factors that is going to make gold attractive as a safe haven.

"Gold prices continue to ratchet higher as the US dollar weakens despite equity markets rebounding on easing concerns about the likelihood of a trade war between China and USA," said Stephen Innes, head of Asia-Pacific trading at Oanda,

"Realistically there are plentitudes of market turmoil in the making that continue to make gold the go-to place to hedge risk." He added.

One of those risks is the tensions between Russia and the rest of the world which started when British Prime Minister Theresa May expelled 13 diplomats from the UK after accusing Russia of using a poisonous nerve agent in an attempted assassination on British soil.

The US has also jumped o board by expelling 60 diplomats, a much larger number than the UK and now Russia is set to retaliate which many predict will throw diplomatic relation between the respective countries into a tailspin and is likely to support gold.

“Gold is in demand at present not only as a safe haven, but no doubt also as a crisis currency,” said Carsten Fritsch, commodities analyst at Commerzbank.

“This is because the political conflict between the West and Russia is escalating in response to the poison attack on a former Russian spy and his daughter in England in early March.” He added.

 

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The British pound is under further pressure today, following on from yesterday’s losses which was sparked by a round of technical selling once the currency hit $1.4250.

But if history is anything to go by, the pound should start to rally as we head into next month like it has done for more than a decade albeit with different growth rates.

"Within the G10 FX complex, there is no stronger seasonality than in GBP through April, it has rallied every single year for the past 14 years." says Kamal Sharma, FX Strategist with Bank of America Merrill Lynch Global Research in London.

Even the uncertainties surrounding Brexit may not be enough to break the pound’s predicted rise

"April seasonality is approaching again for GBP, which tends to rally no matter what the political/macro backdrop” Sharma added.

The pound may receive further support after rumors that a deal is about to be announced by the British government regarding the border between Northern Ireland and Ireland.

The government is expected to announce that they have found a solution which will avoid a hard border between the 2 countries which will remove one of the biggest hurdles regarding Brexit negotiations.

“On the Brexit negotiations a lot of the good news is already discounted but the possible Irish border proposal edged sterling higher. I think we will need further positive news to move it above the $1.42 area,” said Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets.

 

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The Australian dollar is under further pressure today against the greenback after the release of GDP figures from the US came in above expectations which once again added substance for further rate hikes from the US Federal Reserve.

The GDP figures hit the market at 2.9 percent, well up from last month’s number of 2.5 percent which should allow the Fed to hike rates another 3 times this year.

A speech yesterday by a Fed board Member also added to the case to raise rates and he noted that he would like to see them sooner rather than later at the neutral rate which is 2.9 percent.

"For me personally, I think we need to get back to neutral," said Atlanta Fed President Raphael Bostic who is a voting member of the Fed's policy-setting committee.

"Unemployment is very close to something that is equivalent to a full employment position and inflation is approaching back to our 2 percent target. If things are running at close to where we hope that they'll be, then our policy doesn't need to be super accommodative," he added.

Rates in Australia on the other hand are set to stay on hold for some time which will the yield on the US dollar will overtake that of the Australian dollar which has not been seen for some time.

Towards the end of last year, markets were predicting 2 rate hikes from the RBA before the end of this year but now analysts believe there won’t be any move in rates until 2019 and the possibility of them moving lower cannot be ruled out.

This is expected to weigh on the Australian dollar in the coming months and earlier support levels will be crucial in saving the currency from heavy losses.

"If it breaks (76 cents) then the December low at 75 cents is next in line, with $0.7475 below that and then $0.7322," said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.

 

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The gold price has made numerous runs for the $1,370 mark this year only to face stiff resistance with the latest pullback taking the precious metal down to $1,325 at time of writing today

It is now sitting on a critical support level which was a former resistance level around a week ago and some say gold will fall below this level and when it does it may be time to get in.

Phillip Streible, senior market analyst at RJO Futures, predicts that gold will drop to its 200-day moving average at around $1,304.60 an ounce which will be a good time to open a long position but should the price fall further investors should be prepared to exit their positions.

“I think we are going to be stuck in a long-sideways pattern and now we will test the bottom end of the range,” he said. “I would be buying gold around $1,305 and would get out of the market if prices break below $1,300.” He said.

Some analysts say that the US dollar is the key to gold’s direction going forward and traders just need to be patient as gold’s long term uptrend is still on track and the price will eventually reverse.

Gold will “eventually break through the $1,370 level of resistance” said Brien Lundin, editor of Gold Newsletter,

“Despite its recent countertrend rally, the U.S. dollar remains in bear mode, and hasn’t been able break its longer-term downtrend.” he added.

Mr Lundin also noted that some investors are already pulling the pin on the US dollar which hasn’t been reflected into the gold price as yet.

With the smart money realizing that the Federal Reserve is in the latter stages of its rate-hike cycle, while other central banks have yet to begin theirs, the shift out of the dollar is already under way,” he said.

“A weaker dollar is also in the interests of the Trump administration, and all this bodes well for gold going forward.” He added.

 

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The gold price has bounced back today after last week’s heavy losses as news surfaced that China is planning to introduce tariffs in retaliation for US President Donald Trump’s decision to stick tariffs on aluminum and steel.


The world’s 2nd largest economy wants to add an extra 25 percent in tariffs to products such as pork, wine and an array of fruits which some say will hit the respective US industries hard.


Predictions are now coming true that this may turn into a full-scale trade war as the US is bound to introduce even more trade tariffs with China once again retaliating and gold is likely to be one of the main beneficiaries of this situation.

"The trade war is going on and it is getting worse, so that might be the reason that people are selling dollar and buying gold," said Yuichi Ikemizu at ICBC Standard Bank in Tokyo.

The recent volatility in world equity markets, and especially markets in the US is another reason to take positions in gold as investors seek out safe haven assets to hedge their portfolios and some predict there could be a rise of around $100 if the volatility persists.

“Investors are quietly trying to get back into the gold market because of the risks that are growing in the global market place. Investors are still underweight gold,” said Maxwell Gold, head of investment strategy at ETF Securities


“My bullish case for gold this year calls for prices to be between $1,400 and $1,450 and I do think we can get there sooner if we see a continued selloff in equities.” He added.

 

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The Australian dollar will have to rely on other factors to reverse its recent decline after the latest interest rate decision today from the Reserve Bank of Australia.

As widely expected, the central bank kept rates on hold at 1.5 percent which mark’s the 20th consecutive time without changes.

The following monetary statement garnered the most attention as investors sought clues on the potential timing of an interest rate hike in the nearest future but RBA Governor Philip Lowe seemed to brush off any chances of a rate hike over concerns about the economy and especially inflation.

“Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.” Mr Lowe said.

Bill Evans from Westpac also noted that the Governor’s statement was less than optimistic

“Whereas some previous statements from the governor could have been interpreted as mildly optimistic, there is nothing in Tuesday’s statement to fit that description,” he said.

“There is some uncertainty around the immediate growth outlook, tightening financial conditions are noted, a slowdown in improving labour market conditions is observed, and the outlook for consumption remains uncertain.” He added.

Some predict that after today’s interest rate decision, the RBA is in no hurry to lift interest rates and we may not see any move in rates until the end of 2019 and that will only happen if inflation reaches the RBA’s target rate.

"We expect that another year of below potential GDP growth and subdued rates of wage growth will keep underlying inflation lower for longer than the RBA expects” said Kate Hickie from Capital Economics'

"As a result, we doubt that rates will begin to rise until the second half of 2019." She added.

 

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Bitcoin seems to have found a solid support base at the moment around the $7000 mark which was first seen at the beginning of February and if history is anything to go by, the cryptocurrency may be in for a rally in the 2nd half of the year.

Since the beginning of January, bitcoin has tumble around $10,000 to today’s prices, which has left many speculators out of pocket and afraid to jump back in for fear of further losses.

Some say such falls are healthy for the cryptocurrency market and the gains recently made were unsustainable and investors shouldn’t be looking for similar gains in the future.

"It has been this correction that's been mainly responsible for an evolution in investor attitude. I believe that now the overwhelming majority of investors do not view cryptocurrencies as a way to make a fast buck, as perhaps previously many more might have done." said Nigel Green, the founder and CEO of financial services firm deVere Group

The main contributor to Bitcoins recent decline was the threat of various governments around the world to regulate or even band bitcoin, which may have rendered it worthless, but some say the worries are now over and that combined with a generally historical rise in the 2nd quarter of the year may see the currency rise.

"We've gone to the extreme of the regulation which is South Korea thinking they're going to ban it, the U.S. talking about everything being a security, to walking it back .You're seeing a shift again in that type of thing. I think most of that's behind us." Said Brian Kelly, founder of Brian Kelly Capital.

"There will be a significant rally here if seasonality brings tail winds." He added.

 

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The British pound has taken a tumble in today’s trading session after the release of Markit services PMI threw into doubt the overall state of the UK economy.

The all-important PMI figure fell to 51.7 last month, which is significantly lower than the previous month of 54.5 in the previous month and well below analysts’ expectations for a figure of 53.9

Some attribute the heavy snowfalls recently that seriously disrupted business in Britain as being the culprit behind the disappointing numbers so next month’s release will be closely monitored, and another poor figure may lead investors to believe that bad weather was the cause of the slowdown.

Withstanding today’s disappointing figures, most analysts are currently still bullish on the pound and point to a numbers of factors such as expected rate hikes from the Bank of England and a transition deal between the EU and UK, which has seemingly removed the risk of a Hard Brexit.

These factors, as well as a few others they believe will drive the pound higher as the year unfolds.

“Brexit risks are overplayed, my view is that agreements will be made,” said John Goldie at London-based broker Argentex LLP

“While there is inevitable struggle over this period, I don’t think things have been nearly as bad as previously thought. There is room for the BOE to consider a second rate hike this year. If that expectation gathers ground, that’s another reason to see sterling move higher.” he added.

The market has now priced in a more than 60 percent chance that the BOE will hike rates in May with the possibility of a further rate rise in November now gathering momentum.

 

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The Australian dollar is clearly out of favour with investors at the moment as low interest rates, falling commodity prices and problems with China all combine to pressure the currency but that may be about to change.

Iron ore Australia’s biggest commodity is down around 20 percent since the start of the year but has recently stabilized, and this factor along with recent positive round of economic data out of China may see the Aussie dollar reverse its fortunes.

“The drop in iron ore prices has soured the outlook for the economy” says says Saktiandi Supaat, an FX strategist at Maybank.

“We see it likely already in the price of AUD and the recent improvement in the China PMI-mfg numbers could see AUD move higher.” He added.

Most Analysts believe that the Reserve Bank of Australia will keep rates on hold this year and some think there won’t be any moves until 2020, but Mr Supaat believes the market has got it wrong and the RBA will hike rates in the 2nd half of this year as wage growth picks up after remaining flat for some time.

"We continue to see signs that RBA is poised to hike this Aug after a recent observation by RBA that the rate of wage growth appears to have troughed. This is something that we have been observing for the past few months and back our call for RBA to raise cash rate in August” he said.

“As domestic and external demand continues to strengthen and we look for the AUDUSD pair to break above 0.80 within this half of the year," he added