Sterling weakens further after dovish BoE comments

Okay, good morning guys. Final day of the week, 27th of September, so let's get straight into the action. I will give a sort of full rundown on the, the news flow overnight. You know, one of the main features from yesterday was this testimony on Capitol Hill over in Washington. This Trump impeachment saga just escalating. But so we'll talk about that a bit later, but I want to get straight into the action here because we've had a bit of a move lower on the pound this morning. And I'm just going to bring this cable chart and make it a little bigger. We're looking over the last few weeks here. I've got a 1-hour chart. This is sterling versus the dollar. Just add a couple of lines on here. But, you know, certainly we've had a nice steady downward trending scenario here as we've been through this week. And indeed, I mean, I'll just quickly go to the daily chart. You know, this has been the theme. Yeah, we've had kind of 3 quite steep down days in a row if you include this one as well. But that's coming off the top of what had been a rebound. September had been pretty positive for cable coming off the 120 handle that we had tested back at the start of the month. It had been a pretty solid climb up to 126, you know, up to test the areas that we'd seen mid-July. But certainly, yeah, this week it certainly came, come under a lot of pressure as we've had the, all the, you know, developments with regards to the proroguing of Parliament being made illegal and all the rest of it. And so sterling's been under pressure. And just now this morning, we're down testing this low from the 27th of August. But if I zoom in back to the 1-hour chart, you'll see what happened. We broke through the low point from yesterday. So yesterday we had a nice extension of the trend lower trading down to test S1. If I just get my rectangles over here, S1 here was down tested at 10 a.m. and then we bounced and consolidated. So this morning drifting sort of sideways overnight, nice resistance at the pivot level earlier on. And then we're down and we've broken through yesterday's low, down through S1. And, um, the, the, the reason for this was some comments made from someone from the Bank of England. So if we just have a quick look at the headlines here, so Bank of England Saunders has said that prolonged high Brexit uncertainty could warrant looser monetary policy if global growth remains disappointing. So he's got a speech today. This is a pre-release of the text of his speech and kind of picking out the main points. He's talking about these adverse effects of high uncertainty becoming clearer in the UK macro data. He's saying the economy has slowed markedly since earlier this year. The economy has not crashed, but the effect of Brexit uncertainties is perhaps akin to the economy developing a slow puncture such that growth has slowed to a mere crawl. Some further monetary tightening, limited and gradual, probably would be needed to return inflation to target on a sustained basis if global growth recovers— if global growth recovers— and Brexit uncertainties fall significantly. So he's basically saying that if this weakness, I mean, the global growth situation improves, and if the Brexit risk disappears, then yes, maybe the Bank of England should be looking to hike rates. But he's saying in the absence of that, if we do get a continuation of Brexit uncertainties, you know, if Brexit gets pushed to 2020, or if, you know, Boris tries to come out of the EU with no deal on Halloween, then obviously that will prolong the Brexit damage on the UK economic confidence. And it's not looking like the global situation is going to improve anytime soon. So Certainly the headline is dovish, you know, prolonged high Brexit uncertainty could warrant looser monetary policy. So the pound certainly die— I mean, it's trending lower anyway, and this just helped it along to continue the downward trend. So a nice breakout here this morning, taking sterling a little bit lower. I mean, where are the Bank of England? If we have a look at the Bank of England interest rate chart here, so Um, this is looking back over the last few years, of course, and they, they cut rates when we voted to leave the EU back, uh, so actually August 2016, the Bank of England cut rates, um, just a little tweak lower, 25 basis points down. So they cut from 0.5% to 0.25% just to try and, um, allay people's fears and panic in the immediate aftermath of that surprise vote, or the surprise result of the vote. Then they hiked rates at the end of 2017, and that's because it was like, oh, hang on, actually this Brexit risk hasn't had the damaging effect on the UK economy that we had thought. And actually, really more than that, it was actually the global economic situation was very bullish at that point. 2017 saw the highest global growth rate since since the crisis. And the UK benefited from that. Like everyone, when the global growth story is positive, then the UK benefited. And actually, therefore, the Bank of England hiked rates, um, you know, reversing that emergency cut after the Brexit vote. So they hiked rates end of 2017, then they hiked again in 2018 for the same reasoning that, you know, the global growth story at that point was very bullish, inflationary pressures in the UK were starting to build, and so they they hiked to 0.75%. Now, ever since then, we've been flat. And of course, as we've gone into the second part of 2019, you know, the global growth story has deteriorated and Brexit continues to rumble on unresolved. And as Saunders has been saying, you know, the uncertainty of Brexit alone carries quite a damaging effect on the underlying economic system. You know, it's a confidence thing. We, we just don't like uncertainty. You know, human beings will tend to fear the worst, prepare for the worst when we're not sure what's going to happen. And so it's having— it's biting. And so Saunders perhaps opening the door here for a potential rate cut from the Bank of England. They've got a meeting at the start of November, which is their quarterly inflation report meeting. This is the big one. Normally they only change interest rates at one of their— what's called their QIR. So every other meeting carries extra importance where they update their inflation forecasts, they update their growth and unemployment forecasts. And this is where we also get a Mark Carney press conference where he explains everything. These tend to be the occasions where they actually make moves on rates. So you're seeing the pound here this morning just elevating the probability that we're going to see a rate cut from the Bank of England in November. It's going to be interesting because their meeting is literally the week after the current Brexit deadline, Halloween. So obviously we're probably going to be right in the thick of the action. Is Boris going to try and take us out of the EU with no deal? And then would there be a Supreme Court kind of intervention ruling that illegal? And it's going to all be a bit messy. So certainly Bank of England rate cuts getting priced in. So let's, let's change, change up the story then. What else is going on? And here's the kind of main feature of yesterday afternoon. This is all about the Trump impeachment situation, of course, his telephone call with the Ukrainian president Did he threaten to withhold military aid in return for information about Biden, information that he can use to try and help his prospects in the general election that's going to take place in November 2020? Now, just know the latest piece from ITV— let's just turn that down. So we had a testimony, live testimony, from Joseph McGuire here, um, Acting Director of National Intelligence. So he got shoved in front of Congress and got grilled by some angry Democrats. Um, and it's hard to know what's going on here because, um, it looks like from this testimony, if I go down, the whistleblower actually made the complaint quite a while ago. So one controversy is, well, hang on, why is this complaint now only just surfaced? So Looks like they tried to quash and block and hide the complaint, but the whistleblower themselves, who remains anonymous by the way, has sent that. This is from their complaint: I learned from multiple US officials that senior White House officials had intervened to lock down all records of the phone call, especially the word-for-word transcript of the call that was produced. This set in action— this set of actions, sorry— underscored to me that White House officials understood the gravity of what had transpired in the call. Other stuff about apparently their, um, the way they handled the electronic, um, copy of the phone call. So the whistleblower explains concerns about how the White House officials handled the transcripts. The whistleblower said it was removed from the normal electronic storage system for transcripts and put in a separate electronic system used normally for only very highly sensitive information. So one White House official described this act as an abuse of this electronic system, blah blah blah, you know the story here. So, you know, Trump is being accused— did— I mean, they released the transcript of the telephone call, but is it the genuine transcript? I mean, the one they released— I mean, we talked about this yesterday— but the transcript they released showed Trump asking for information on about Biden but did not show Trump threatening to withhold military aid if no information was forthcoming. So look, this is, this is rolling on. Um, Trump, uh, one thing to note, I was reading this article this morning, something I didn't realize, um, uh, where was it? So I can't find the exact quote in this article now, but it's basically saying that the whistleblower— most of the intelligence that the whistleblower has is secondhand, and most of what he's complaining about, he did not witness himself. I'm saying he, it might be a she, I don't know. It's an anonymous person. So basically, the whistleblower's laid out all of these complaints, but actually it looks like they didn't witness much of it at all. So this forced Trump into a tweet last night. A whistleblower with secondhand information? Another fake news story. See what was said on the very nice, no-pressure call. Another witch hunt. So this is classic Democrats versus Trump, and the election campaign's fired up. I mean, this is gonna roll on. I still don't think— I mean, in my view, impeachment risk, I just Trump's, Trump's got through so many scandals in the last few years. This is another one, and I just don't think it's gonna lead to an impeachment. I mean, look, check out, I don't know, check out US stocks. They don't care. This story is not of any interest particularly. And you know, you've seen this week that generally the S&P's kind of been sideways where we're trading right now, the same kind of price points we were seeing at the start of the week. Yeah, we've had a, a couple of ticks lower here on the 24th, we had that break, but generally it's been quite stable as we're consolidating just below the 3,000 handle. So from a market point of view, you're not really seeing much reaction to this, uh, Trump impeachment saga. Um, whilst I've got the charts open, uh, let's have a look at gold, cuz gold had a little bit of a move earlier. Some of you were looking at this and talking about this. So really, this is a good example. So, you know, what happened here? What's the news? You know, what led gold to spike lower? And it wasn't a spike, it was kind of a, you know, quite an aggressive move over about a 10 to 15 minute period. So I'm talking about this sell-off in the red box. And this is a good example. So sometimes price moves and there isn't a fundamental reason behind it, and this is definitely one of those. What we've got here is a move below— and actually, I'm going to go back to the 1-hour chart. We've got a, a break below a technical level which was set on the 25th of September, Wednesday's low, which got retested on Thursday. So you've got a double bottom here. If I— I talked about this level yesterday in the briefing. If we just kind of extend my my rectangle now to encompass the fact that it set the low for yesterday as well. So you've got quite a nice double bottom for the week here, and the market just broke it this morning. And this has taken gold prices down to almost test the $1,500 handle. Now, the reason for the acceleration in the move lower is just that there's stop orders below these key levels. So people are long gold, and what they're doing is they're setting their sell stop orders just below key technical support levels. And this is a key technical support level, and it got broken this morning, triggering these stop orders. Then you get stop orders triggered and selling, and this stop order selling force creates the accelerated move to the downside. So we call this a technical breakout, um, and that's the reason for this move and what's happened since. Is we've had a nice pullback and, you know, you should be really looking for that. I mean, let me just get this, this, this technical line here on the shorter timeframe accurate. So let me zoom back in. So the technical level, which was yesterday's low, is now providing a decent short area. So $1,507 is resistance with looking for a test down at $1,500 perhaps if this downward trajectory continues through the morning. So a bit of action on gold. Bit of that move on cable, and it's still making new lows as I speak, actually. And whilst we're here and talking about cable, and I'll bring in the euro as well, I mean, obviously cable's been trending lower this week, but so is the euro-dollar. And actually, underlying all of this, it's all too easy to always focus on sterling or focus on the euro. You know, this week in Europe we've had some really bad economic data. You remember right back at the start of the week what got the downward trend moving was that really bad set of PMI numbers out of Germany and France. And so, yeah, the euro has been weak, but actually don't forget about the dollar here. And the dollar has been strong and that's been the theme of the last few weeks. And I think it comes from that FOMC meeting that we had last week. Yes, they cut rates, but I think what we saw was that there was a difference of opinion on the committee. We've been looking here and I know you were talking about this in the room earlier, but we're looking here at what are the Fed going to do with interest rates at their next few meetings. And have a look at these graphics. So this is looking at Fed funds futures pricing, and from the pricing of these assets, we're able to effectively compute a probability of where markets think rates will be at the next meeting. This is looking at the October 30th meeting. So remember, rates right now are between 1.75% and 2%. So right now, the, the futures pricing is giving us a probability of 55.1% that rates will remain unchanged, and there's a 44.9% chance that rates will be cut again in October. Okay, so this has changed. Um, you know, it was the case that the probability was in favor of another cut in October. So this has swung in the last week. But I think what's much more important is the December meeting. For me, the chances of an October cut, I don't think it's going to happen. I don't think it's the Fed style. They tend to want to cut every other meeting 25 basis points, you know, keep it slow and steady, under control. So if you like, it is the December meeting that's the more likely one anyway. And certainly the stats say that. But look, and in one 25 basis point cut in the December meeting on the 11th of December is now at a 49.3% chance. Um, it was a lot higher than this, so the probability of a December cut has dropped. Uh, there's also a probability of a double cut, so I guess you're taking in October here. So the probability of a cut in October and then another cut in December was also dropped, but it's still at a decent 18.1%. Something that's gone up is the probability of no cut. So I guess what I'm saying here is the probabilities of rate cuts have shifted down, which has just fed into a little bit of dollar strength over the course of this week. And that dollar strength has been exaggerated because you've had— particularly when you're looking at the euro and the pound, you know, you've had two weak currencies there. So the euro has been weak because of European data. The pound's been weak obviously because of the escalating Brexit risks and uncertainties. And put that against a strong dollar, and then that makes for, you know, pretty decent moves in exchange rates. So over the course of this week, you know, euro-dollar has gone, you know, up at 111 or even 112 handle, down to below 110. So, you know, decent kind of 200-pip trend to the downside for EURUSD. And cable, you know, it's been much more dramatic. We were trading up at 126 at the start of this week, or end of last week at least, and here we are trading at 123. So we've had a 300-pip move to the downside here for cable. So definitely strong moves. But, you know, don't forget the dollar in all of this. It's all too easy to just focus on the pound and Brexit, just focus on the euro and European data. Don't forget about the dollar. Um, okay, a couple of other things just to wrap up. Um, I caught a story in the FT that I wanted to put on the table, um, not for now immediately, but for quarter 4 and maybe going into next year. Um, Eastern Europe currencies take strain from manufacturing and mortgages. So this bad data in Europe is very bad news for Eastern Europe who are very dependent on the core big European economies such as Germany. So I'm talking particularly here about Poland and Hungary. Their economies are very dependent on Germany. Germany's economy, we think, may be in a recession, and as of yet, Germany's government are not rolling out any stimulative fiscal policies. So you're definitely seeing the German economic weakness bites hard in Poland and Hungary. This has led to the Polish and the Hungarian currencies devaluing. Now, there's a big problem that's hidden under the carpet in these two countries. Um, after the crisis in these two countries, uh, people buying houses suddenly were offered this amazing deal from Swiss banks, and they were offered Swiss franc-denominated mortgages at interest rates that were way lower than the interest rates they would be— they were offering in mortgages in their own— from their own banks in their own domestic currencies. Okay, so the problem with this is if their currencies devalue, well, their Swiss franc-denominated mortgages, those mortgages get larger, the interest payments for those mortgages increase, and this becomes a massive problem for consumers who have, who have these mortgages. This came to a head in Hungary. Believe it or not, two-thirds of all mortgages are Swiss franc-denominated, and Hungary basically forced— well, the banks in Hungary were forced into switching the Swiss franc-denominated mortgages into the Hungarian current at huge losses. Basically, the government forced the banks into re-denominating these mortgages at an exchange rate that was way off what markets were trading, and Hungarian banks took a massive hit. Okay, now in Poland, this hasn't happened yet. In Poland, which is a bigger economy, a similar kind of size number of mortgages that are Swiss franc related, and you've got this scenario where now Polish banks are very scared that they're going to get forced into this revaluation and have to take a massive write-down. And of course, consumers are saying these mortgages were missold. They were missold, these mortgages. They were not told about the exchange rate risks that they were taking, you know, outside of their knowledge. And so it looks like another banking scandal that's ready to rear its head, and you might find if the European economic weakness story continues and these Eastern European currencies continue to devalue. And, you know, the foreigns are a record ever low, by the way. Then, you know, you might find this story flare up and we might get some European banking risk rearing its head over in Eastern Europe. So just a story to put on your tables to keep an eye on in the months to come. Let's finish by looking at the data calendar for today, and, um, looks to be quite a lot on it except for— we've gone through some of these numbers from earlier this morning with regards to stuff like German import prices that were negative, but yeah, just slightly worse than expected, you would describe them. We had French CPI numbers that were slightly lower than expected, so, you know, certainly helping with that sort of euro weakness theme that we've seen this week. Um, but other than that, we've got an economic sentiment number out of Europe at 10:00 AM. It's not a particularly tier 1 release, that, so I'm not that interested. Uh, mostly the, the— this afternoon we've got core PCE data, uh, from the US, which is important. This is inflation-related data. We've just been talking about the probabilities of the Fed hiking rates— sorry, not hiking, cutting rates. And, you know, it's this type of inflation data that certainly the Fed will be monitoring closely. Although I would put a caveat on this. This data is for August, and here we are almost at the end of September. So it's not one of the head— you know, we're in a couple of weeks' time, we're going to get September CPI data. That's much more important than this inflation data that we're going to get today. But nevertheless, it's inflation data, so we're going to be monitoring it and seeing if it has any kind of impact. We've also got durable goods orders and then Michigan sentiment. So this is consumer sentiment data at 3 o'clock, but this— be aware, this is the final reading for September. The University of Michigan released two readings per month, and it's normally the preliminary reading that's released two-thirds of the way through the month that's the more market-sensitive this final reading is like an updated, revised version of that preliminary reading. You don't often get too much change from the preliminary, and therefore this number's less market sensitive. We've already had the Bank of England's Saunders release his text, and, and he's— the reason why it moved the market is because Saunders is normally hawkish, but of course one of his comments at least was dovish. And that's what kind of got Sterling moving to the downside there. Um, other guys talking 9:15, we got de Guindos, dovish speaker from the ECB. Um, you got Fed's Quarles and, uh, Harker, and then you got ECB's Weidmann at some point, which might be a little bit more interesting given that Lautenschlager, the current ECB German representative, stepped down and resigned this week. So, uh, Weidmann's comment, who was another German representative on the ECB. His comments might be a little bit more interesting given that development earlier in the week. Um, okay, so that's the situation. Uh, stocks are pretty steady here, uh, this morning. Uh, the pound's under pressure. Gold's had a technical breakout to the downside. Uh, that's, uh, the DAX has just sneaked a new high. Um, so that's the flavor of things here we get the session underway. So enjoy the rest of the day, enjoy your weekends. Thanks very much.