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ECB interest rates and Brexit related GBP rise begin to fade this week?

Monday, October 21, 2019 11:59 AM GMT

Last week’s forex trading sessions were once again dominated by the movements in sterling currency pairs, fluctuations caused as a consequence of the ongoing Brexit issues. The Traders and Investors within our copy-trading community who analysed the fundamental and technical scenarios correctly, will have remained long sterling pairs, such as GBP/USD and GPP/JPY and hoovered up pips, while banking significant gains. Closer inspection of the ZuluTrade rankings can reveal which Traders remained long sterling pairs throughout the week as the Brexit developments were broadcast. The Trade Wall section of the ZuluTrade website also provides the ideal venue for both Traders and Investors in our community, to discuss their decision making.

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Analysis of the major currency pair movements during the past week reveals that GBP/USD registered the highest gains, rising by 2.58% and at one stage breaching the 1.300 handle, a level not reached since May 2019. The trading range for GPB/USD has been close on 1000 pips during an approximate six week period; from 1.2000 to 1.3000. Price has finally broken up through the 200 DMA, a level not breached since mid-May. 

As is clearly illustrated by analysis of the daily time-frame, GPB/USD enjoyed bullish momentum during the trading week. The Heikin-Ashi candles / were closed, the MACD generated bullish signals and despite the stochastic lines exhibiting overbought characteristics, the RSI was still short of the 80 level (which can illustrate a security which is overbought) while the PASR provided stop loss placement indications. Therefore, on the basis of some of the most popular technical indicators, day and swing-traders were entirely justified in their decision to remain long throughout the week’s trading sessions.

 

After an unusual and historic sitting of the U.K. Parliament over the weekend, attention will now turn to the current week and any further developments. As an issue, Brexit is an overarching factor on sterling’s value and such a factor will not suddenly disappear. The U.K. government needs to have their Queen’s Speech pass this week (highly unlikely based on current political party arithmetic), they also have to consider bringing back their meaningful vote to attempt to exit the E.U. on October 31st. Meanwhile, the current government might face a VONC (vote of no confidence). The prime minister Johnson could also face contempt of court proceedings due to not fulfilling the criteria laid down by the Benn Act. Taking all the aforementioned factors into consideration it’s tricky to know where GBP/USD and other sterling pairs may be headed during this week’s sessions. 

It could be suggested that sterling is overbought, particularly versus USD and EUR, as despite the Brexit deal being agreed between the U.K. government and the E.U. the revised withdrawal deal is still undeniably damaging to the U.K. economy and is (arguably) only a marginal improvement on a no-deal exit. The sterling relief rally which has enveloped FX markets over recent weeks, may begin to fade. Therefore, ZuluTrade’s Traders and Investors would be advised to remain vigilant regarding breaking Brexit news and ensure they’re on message with regards to economic calendar events and data concerning the U.K. by regularly visiting our economic calendar section. 

Trade Economic News at ZuluTrade

GBP Outlook 

The listed calendar events likely to impact on the value of GBP this week includes a series of four public sector borrowing figures, to be published on Tuesday October 22nd. The forecast is for a deterioration in government borrowing and increased spending for the month of September. If the predictions are met, the U.K. deficit and national debt will rise. On October 25th the latest sovereign debt ratings for the U.K. by Standard & Poor’s rating agency will be published, ratings which could be affected by the U.K. monthly GDP figure coming in at 0.00% last week. Brexit predictions suggesting a fall of up to 7.5% of GDP, rising government borrowing figures and poor S&P ratings, could negatively impact on the value of GBP this week, irrespective of any bullish, Brexit, sentiment. 

USD Outlook 

The value of USD has slumped sharply over recent weeks, successive interest rate cuts during 2019, combined with the belief that the FOMC  will cut again during their upcoming rate setting and monetary policy meeting at the end of October, has caused the desired effect President Trump had requested  as a cheaper U.S. dollar results in better value for USA based exporters. If the FOMC does cut at the culmination of their October 29th-30th meeting, it would become the first time interest-rate cuts had been applied three times in successive committee meetings since 1998.   

Richard Clarida, the vice chair of the Fed is suggesting the FOMC is adopting a dovish policy, but will take a short-term approach and isn’t overly concerned by the globe’s largest economy and its current performance; 

“Looking ahead, monetary policy is not on a preset course, and the committee will proceed on a meeting-by-meeting basis to assess the economic outlook as well as the risks to the outlook, It will act as appropriate to sustain growth, a strong labor market, and a return of inflation to our symmetric 2 percent objective.” 

The dollar index, the DXY, has fallen by -1.13% weekly and -1.10% monthly, USD has also fallen individually versus: EUR, CHF, GBP and both antipodean dollars during the same periods. USD has only risen marginally against JPY monthly, due to the Bank of Japan considering further monetary easing and the Japanese government weighing up their options, regarding extra fiscal stimulus. 

During this week the economic calendar is relatively light of USA events. On October 24th, IHS Markit  who compile leading economic indicators derived from surveys of senior executives and purchase managers at private sector companies, will release a slew of October PMIs relating to the manufacturing and services sectors. The composite reading, which came in at 51 for September, will be closely monitored. If it falls below 50 it could prove to be an early indication that despite the equity markets indices recently approaching record highs, the USA economy could be flirting with recession. 

Whilst on the subject of a potential recession, it’s worth noting that during a recent speech he delivered at the IMF  the previous Bank of England Governor, Mervyn King, voiced concerns that the world is sleepwalking towards a fresh economic and financial crisis, that will have devastating consequences for the democratic market system.  

Other notable calendar events relevant to the U.S. economy this week includes existing homes sales data, to be published on October 22nd at 15:00 pm, which is forecast to show a drop to -0.7% for September. On October 24th at 13:30pm U.K. time the latest durable goods orders data for the USA will be printed, predicted to come in at -0.7% for September, falling from 0.2% in August. 

Home sales and durable goods orders in negative territory, Markit PMIs close to contraction and recession levels, with a backdrop of falling GDP, could be indicative of the USA economy facing recessionary pressures. However, USA equity market and USD sentiment this week may be further improved, due to the ongoing positive noises surrounding the China-USA tariff talks.  

Trade Economic News at ZuluTrade

EUR Outlook 

Other than the potential for ongoing Brexit negotiations, the most likely event which could impact on the value of the euro this week, involves the latest ECB interest rate decisions  to be revealed on October 24th at 12:45pm U.K. time. The widely held forecast delivered by the news agencies Reuters and Bloomberg, after they’ve polled their panel of economists, suggests no change from the 0.00% rate, with deposit rates remaining at -0.50%. Once the rates are revealed focus will quickly turn to ECB President Draghi’s monetary policy statement, broadcast at 13:30pm, during his visit to Munich. 

The ECB interest rate announcement will come after a raft of Markit PMIs are published during the London-European trading session from 8:30-9:00am. The highlights include Germany’s manufacturing, services and composite PMIs, which are all predicted to show modest improvements. The overall Eurozone composite reading is printed, also predicted to reveal a marginal improvement. On a weekly basis, EUR/USD has risen by 1.07%, EUR/CHF is down -0.14%, while EUR/GBP is down -1.00% and -2.17% monthly. Market participants will carefully analyse both the Markit PMIs data and the Draghi commentary, in order to price the value of the euro versus its peers.

 

Disclaimer

The views expressed do not constitute investment or any other advice /recommendation /suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in the report do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade.

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