The pound sterling has retraced roughly 50% of the bearish move from mid-summer last year. The move has been rapid, but now looks to be running out of steam, with a significant reversal from the highs of last week’s already in place. At the moment it’s difficult to ascertain whether we have seen the high point in the cable bounce, but there is every chance that this is the case, as the reversal hit one of the most likely target zones. The price action in the next few days should either confirm or invalidate this view. This move has been part of a general firming of the dollar which has impacted other major currencies, but the pound sterling has been a clear underperformer for the last few sessions, as can be seen from the EUR/GBP bounce. The fact that this mini dollar revival has occurred at a time when European stocks have retraced to key levels may or may not be coincidence, only hindsight will provide us with an answer, but I am mindful of the powerful dynamic that was in place during the dollar bull trend – at that time we saw equities rally alongside the greenback.
The US dollars recovery was certainly not supported by great economic data on Friday. Industrial production numbers were, frankly, quite disappointing with another small decline versus forecasts of a small uptick. I can’t say that this is particularly significant yet, it points more towards stabilisation than stagnation, but a few more bad data points and all bets are off. If the industrial production numbers were ‘quite’ disappointing then the Michigan Sentiment data was ‘very’ disappointing. Nevertheless the US equity markets closed at record highs on Friday as equities celebrated what might be receding chances of an early rate rise.
In other parts of the world, industrial production numbers in Japan were slightly disappointing, and house prices continue to decline in China. It is clear that Chinese policy makers now consider the slowdown to be the most significant since the global financial crisis in 2008, and action is likely to try to reflate the economy. The great rebalancing – from exports to consumption – needs to be achieved within a context of an acceptable growth outcome otherwise the legitimacy of the Communist Party could be under threat. Viewed on that basis, it is clear that authorities will deliver decisive action to counter the threat of a serious slowdown.
This could be a pivotal week in the story of the greenback this year. Is the correction over? Is there more to come? We may start to get a more definitive answer in the next few days, but I do believe we are closer to the end of the correction than the start.
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