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Weekly Digest - Rate decisions this week on AUD and GBP

Monday, November 4, 2019 12:05 PM GMT

Two calendar events dominated forex traders’ collective minds last week; Brexit and the FOMC rate-setting decision. GBP/USD traded in a narrower range than witnessed during previous weeks, when market volatility increased due to the overall Brexit uncertainty. The impact on sterling was relatively benign during the early part of the week, after the U.K. Parliament finally voted to read the revised Brexit withdrawal agreement, but rejected the time table of thirty-six hours to debate and (potentially) pass the WA. The Brexit issue then took a fascinating turn, after the U.K. Parliament voted to hold a general election on December 12th. 

Brexit uncertainty has been replaced with the General Election fervor in the U.K. 

Sterling traded up versus its main peers on a weekly basis; GBP/USD closed out the week up 0.88% and up 5.15% monthly. Price is trading close to the 1.300 handle and significantly above the 200 DMA, sited at 1.271. Traders and Investors who remained long GPB called the market right last week. If you drill down into the granularity of the ZuluTrade Trader list and ranking, the data can reveal which ZuluTrade Traders ignored the trading noise and remained steadfast in their convictions, regarding overall GBP strength. 

Trade Economic News at ZuluTrade

The major pair was set for its largest monthly rise for a decade in October, but according to certain analysts a significant proportion of this rise is attributed to dollar and euro weakness, as opposed to overall sterling strength.  

Simple analysis of both EUR/USD and GBP/USD major pairs during the month of October using the daily time-frame, appears to support this theory; the U.S. dollar has fallen by over 5% versus sterling and circa 2% versus the euro, despite the dovish statements made by the ECB President Mario Draghi last week, during his last official appearance. The prediction of the impending FOMC rate cut announcement undoubtedly concentrated institutional traders’ minds, as they began to set a direction and value for USD, based on the inevitability of the rate cut.

 The similarity between the movements of GBP/USD and EUR/USD are replicated on other charts such as that of the AUD/USD. Such correlated movements witnessed during the month of October, should provide a timely reminder that both Traders and Investors should always pay attention to the impact correlations can have on trading outcomes. A subject that’s worth investigating in order to ensure you’re not inadvertently taking opposing bets, with little chance of success. Whilst the majority of FX traders, both retail and institutional, are aware of the dynamic negative correlation which consistently exists between EUR/USD and USD/CHF, there are other subtle correlations that always need to be factored into your trading decisions. 

Trade Economic News at ZuluTrade

Similar to trading Brexit, trading the U.K. General Election will offer up tremendous opportunities over the coming to bank gains 

Traders within the ZuluTrade community who specialise in trading GBP have needed to remain vigilant with regards to breaking Brexit news over recent weeks. Despite the Brexit issue being temporarily parked after the E.U. granted an extension up to January 31st, the general election has already created a new dynamic which traders will need to remain constantly vigilant of, right up to the trading sessions straddling both the election night result on December 12th and the morning after, Friday 13th. 

It’s tricky for analysts to predict how sterling will react to any election developments, due to the unpredictability of General Election campaigns. As manifestos are released and polling firms distribute their latest questionable results, GBP will undoubtedly fluctuate as FX markets attempt to bet on the outcome. Previous patterns of behavior when U.K. elections have been held, suggest that unless critical issues occur, GBP will range rather than trend during the election campaign period. During this period our ZuluTrade Investors may wish to consider using our unique, proprietary, tools to manage their positions, features such as Traders Combos , Automator and ZuluGuard could prove to be extremely valuable tools for mitigating and spreading investing risk during the election period. 

Has the FOMC rate cut and the accompanying narrative set a new course for the U.S. dollar? 

As widely predicted by Bloomberg and Reuters analysts, the FOMC cut the interest rate for the USA economy. The statement delivered by Jerome Powell contained predictable concerns regarding USA GDP slipping markedly since 2018 and the potential threats regarding global trade. Therefore, despite the China-USA trade war and tariffs issues falling off the radar as a threat and USA equity indices once again threatening to set new record highs, Jerome Powell and the FOMC committee believed it was appropriate to cut the upper bound rate from 2.00% to 1.75%, the first time three successive cuts have been instigated since the Great Recession. The fact that the chief of the Federal Reserve has encouraged his fellow Federal bank colleagues to dramatically lower the key interest rates, when the USA economy is supposedly progressing, might suggest that he has access to intelligence us mortals aren’t seeing; is he getting ahead of the curve to head of potential recessionary threats? 

President Trump has consistently leaned on Mr. Powell to cut rates throughout his tenure, Trump’s contention is that a higher dollar is holding the country’s economy back. Now the rate has been cut three times it’ll be fascinating to note what effect will take place, over the short to medium term. But a pattern has now been set and since his appointment Mr. Powell has completed a complete u-turn from the pattern set by his predecessor, the Fed has reversed from hawkish to dovish; lowering rates with a view to making borrowing cheaper to stimulate growth. The revised plan will be bullish for stocks, particularly the buy-back phenomenon allowing corporations to borrow cheaply to make the stock scarce, which has (arguably) caused equity markets to rise over recent years, rather than rising due to economic sentiment, or improved performance.  

Trade Economic News at ZuluTrade

This week’s high impact calendar events likely to affect the forex markets 

On Monday November 4th at 19:30pm U.K. time, the newly appointed ECB President Christine Lagarde will deliver her first speech in Berlin. This could prove to be bullish for the euro, depending on the content of her speech. Naturally, she’ll be determined to stamp her own authority and identity on the position, while beginning to deliver forward guidance. In the morning session on Monday, a series of IHS Markit metrics for the Eurozone will be published, there is little expectation amongst analysts at Reuters for any significant changes.

Tuesday November 5th begins with Australia’s central bank rate-setting decision. At
30.75% there is little anticipation amongst analysts for change. As always, it’s not necessarily the rate-setting that can cause fluctuations, it’s the press release, press conference, or statement by RBA officials which will be closely watched by Aussie dollar investors to predict AUD direction. 

The rate-setting announcement takes place at 3:30am U.K. time, therefore, with liquidity being lower during a time of sudden, higher volatility, spikes may occur in the Aussie dollar versus its peers. AUD/USD registered considerable gains during October, up 1.33% weekly and 3.13% monthly while following a similar trading pattern to GPB/USD and EUR/USD, during the month.

 The day’s significant calendar releases continue with the latest IHS Markit readings for the U.K. construction and services sectors published at 9:30am. Both readings are forecast to remain below the 50 level, indicative of an economy mired in a recession. The publications could affect the value of GBP, if the figures miss or beat expectations by any distance. USA data published later in the day includes the latest trade balance figure, predicted to reveal a slight improvement to -$52.5b for September and the latest ISM non-manufacturing services PMI for October, which is forecast to show a rise to 53.4 from 52.6.  

At 21:45pm a series of data releases relating to employment in New Zealand could impact on the value of the kiwi dollar. Employment is predicted to reveal a sharp fall and unemployment a corresponding sharp rise, results which could affect the value of NZD versus its peers, particularly versus USD as the USA trading-session reaches its end. Similar to the aforementioned issues with the AUD rate-setting decision, the low liquidity and increasing volatility when the data is published, could create price-action trading opportunities for NZD. 

Wednesday November 6th begins with the publication of Germany’s latest factory orders data at 7:00am. The readings, both monthly and annually, will be closely monitored based on the fact that any return to Eurozone growth, is dependent on the engine of European growth firing on all cylinders. Monthly factory growth in Germany is forecast to reveal a 0.1% growth figure for September, from -0.6% in the previous month, a reading which could cause EUR sentiment to rise if the prediction is met. A range of November IHS Markit PMIs for the Eurozone are published in the morning session from 8:45am onwards and there is little anticipation amongst analysts, for any dramatic changes compared to the previous month’s readings. 

Trade Economic News at ZuluTrade

Thursday November 7th starts the London-European session with the latest German industrial production figures published at 7:00am, predictions from Reuters suggest the figures will have deteriorated moderately in the month of September, from 0.3% to -0.3%. The U.K. office of budget responsibility (OBR) will publish its latest forecasts, which take on more importance due to the upcoming general election. Focus then turns to the latest base rate-setting decision, to be revealed by the U.K. Bank of England at 12:00pm U.K. time. There is no expectation for any change from the current rate of 0.75%. Attention will then quickly turn to Mark Carney, the BoE Governor and his colleagues, for the commentary accompanying their decision, during his press conference at 12:30pm. Traders and Investors would be advised to maintain vigilance during the various GBP related calendar events. 

Friday November 8th witnesses the rating agency Moody’s publishing their latest sovereign debt rating for the U.K. during the overnight trading-sessions, which could impact on the value of GBP versus its peers, once London opens for trade. At 7:00am a raft of German data is broadcast, which could prove to be bullish for EUR, if the forecasts are met. Germany’s exports, current account balance and trade balance, are all forecast to illustrate marginal improvements in the overall economy. In the afternoon session focus turns to the Canadian economy when the latest employment/unemployment data and building permit metrics are published. Forecasts suggest less jobs were created in Canada, with unemployment remaining steady at 5.5%. Building permits may reveal a sharp drop, to -1.8% in September, from 6.1% in August. Overall such data could be bearish for the Canadian dollar.

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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