Sentiment in the British pound has continued to deteriorate through the summer months, and as the likelihood of a ‘hard Brexit’ becomes more of a reality, we will expect to see more weakness in sterling asset classes. In August, the GBP-USD currency pair rate hit 1.2015, its lowest level in 31 months.
With Brexit developments looming large over the markets, the impact is starting to be felt in the UK economic data docket. Second quarter UK GDP showed contraction, coming in at minus 0.2 per cent quarter on quarter, while the year-on-year GDP growth rate slowed to 1.2 per cent, down from 1.4 per cent expected. Industrial and manufacturing growth rates came in deeply in the red, hinting at even more contractionary conditions.
Perhaps the only glimmer was a stronger than expected inflationary print, which came in at 1.9 per cent year on year. This stopped the bleeding for cable long positions and has seen GBP-USD move upward of 1.21 in recent days.
But this rally seems short-term in my opinion. In my previous piece, I had expected to see a downward move towards 1.1990 levels and I expect another test of the psychological 1.20 mark through the end of this month and early parts of September. Technically, a breach of these levels would expose the channel between 1.17 and 1.19 in the lead up to the Brexit deadline on October 31. Barring any shock Brexit developments, I don't foresee upsides past 1.22 to 1.2250 in GBP-USD going forward, and these levels would represent the safest entry level for short positions with a two-month view.
The US-China trade war also had some developments this month. After announcing another round of tariffs on up to $300 billion (Dh1.1 trillion) worth of Chinese goods, last week US President Donald Trump decided to delay the decision of imposing those tariffs, bringing positive risk moods to the market in the short term. The Dow Jones rallied from 25200 levels to post three consecutive days of gains. While my earlier support levels at 25606 were breached (the Dow hit a low of 25233 last Thursday) the market bounced back more than 1.95 per cent from my support levels. Expect risk moods to stay strong as long as the trade war stalemate continues – however judging by the sensitivity of markets, any unfavourable developments would see sharp sell-offs, so it may prove wise to hold off before building any further positions.
I expect US dollar prospects to remain strong through the next few weeks in the lead up to the Federal Reserve policy meeting on September 17 and 18. It is at this meeting where many market participants expect to see a potential further 25 basis point cut, which would mean weakness in the US Dollar in the immediate aftermath. The meeting minutes from the most recent decision on July 30 and 31 are due for release Wednesday and this would yield further clues as to how the Fed views future rates.
Overall, in the medium term, not much has changed in my opinion. Brexit uncertainty, the trade war and further dovish action from the world’s most powerful central banks make me maintain a bearish view for the months ahead.
To compound this, we saw US yields on 10-year bonds drop below those of the two-year yield for the first time since the debt crisis back in 2008. Such an inversion could point to a longer-term recession – and when you add up all the other underlying factors, the picture does not look so bright.
All eyes will be on the upcoming Jackson Hole Economic Symposium beginning this Thursday. Held annually for the past four decades and sponsored by the regional Federal Reserve Bank of Kansas City, this meeting is where several of the key global central banks converge to discuss future monetary policy and important issues facing world economies. Developments from this symposium may echo my views on the position of the global economy through the rest of 2019.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti
