Saudi Arabia looks like it’s battening down the hatches with its rumoured strategy to take out high cost US Shale gas producers. No one can argue that the strategy (if it is true) has been working but the growing fiscal stress in the middle eastern giant shows that the casualties are not just on the American side. The Financial Times reports that Saudi Arabia has been withdrawing tens of billions of dollars from global asset managers in an attempt to plug a widening deficit. This is newsworthy for many reasons, not least it is a sign of the resolve OPEC has to maintain supply with the consequence being that oil prices will remain at current levels or possibly lower for some time to come. This will have a big impact on inflation globally. But it’s also important because Europe has historically been a beneficiary of the luxury consumption of oil producers that might be less evident in the coming years. When you consider all this, it’s not that surprising that the Centre for Economics and Business Research (CEBR) predicts that rate rises aren’t like from the Bank of England until at least the summer next year. Interestingly GBP/USD is actually a bit stronger this morning. After the rapid descent of the last few weeks, it is likely time to be cautious as a correction might be due. If this is the case the bounce could take us up to the 1.53 – 1.54 zone before a larger decline pushes cable towards the 1.40s. That would be my best guess for what we have in store over the next few months. If that’s the case, the next week or two could represent your last chance to sell pounds and buy dollars at reasonable levels. You have been warned!
We have already spoken quite a bit about the Federal Reserve’s hesitation with regards to raising interest rates. Whether you agree with it or not it is clear that the labour market targets, set by the FOMC, have largely been met, so the question is… what could force the Fed’s hand at this point? The answer is obvious.. inflation. As it happens we get some core PCE data later on today, I believe that this data point, as well as CPI and average hourly earnings will be the focus for the market going forward. Any numbers that indicate that prices are rising faster than expected will bring closer the day when interest rates rise for the first time in almost a decade. From a currency perspective this means that the risk for abnormal currency moves will be greater around these data releases going forward. For now, I don’t believe the risk of positive inflation surprises is too great, but we should bear in mind that the large falls in energy prices are working their way out of annual CPI indices now, and we will be in new territory over the next few months. Of course it might all be irrelevant by then, Yellen might have already bitten the bullet. I doubt it, but we shall see.
For this week, I believe there is a significant risk of some sort of GBP/USD bounce, but in my view such a move would be corrective in nature, the signs look set for a significant impulsive move lower. We could therefore be observing the last chance to sell GBP against a number of currencies at bargain levels, particularly against EUR and USD….
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