Investors begin cashing out on Sterling, is this the end of the rally?
15/Jul/2014 • Currency Updates•
Sterling took a tumble early on yesterday as investors looked to cash in their long positions. The pound fell about half a cent on Euro and Dollar.
After 5 years of steady appreciation against the dollar, markets are trying to decide whether we have reached the top of the range. Last week saw Sterling’s first weekly loss across the board this quarter, which has apparently panicked some investors long on the pound. Around 40k more bets were taken on a pound rally than a decline last week, but this was down 15k from the week before. We can expect the figure to be even lower this week.
Data is thin on the ground this week, although inflation today could move markets if it comes anywhere outside expectation. Economists are currently calling around 1.7%, a slight uptick from last month and that little bit closer to the 2% target. Consistently improving inflation over the coming months will naturally bring forward the prospect of interest rate rises and give support to the pound. Mark Carney will also be speaking this morning, right after CPI data is released.
The single currency took advantage of the Sterling sell off to record a second consecutive days gain against the pound, while it even managed to bite back against the dollar.
With no major data or central decision to focus on, attention turns briefly away from currency markets. Early details of Mario Draghi’s massive stimulus package suggests the ECB president will be giving banks access to €700bn, or $1tn, worth of cheap loans. The TLTRO programme will flood the economy with easy cash meant for consumer spending, but has the added benefit of shoring up the banks’ own balance sheets (see Portugal).
Italian inflation this morning but the focus will be on a German ZEW economic sentiment survey this morning.
No real news, events, or data from the US yesterday had the dollar vulnerable to other currency movements. Bearish Sterling sentiments pushed the dollar up but a Euro rally sent euro/dollar down.
The lack of volatility in money markets we mentioned yesterday has spilled over into stocks, with a range of volatility indices, usually measured on the price of options, at multi-year lows. The only raft of volatility came off the back of Portuguese stability worries.
We could see some movement in the greenback today, as Chairman of the Fed Janet Yellen delivers her bi-annual monetary report to congress. Markets will be hoping for some elucidation of the Fed’s exact plans for ending stimulus.
Retail sales are out at lunchtime, followed by Yellen testimony.
The Yen’s status as a safe haven asset is both a blessing and a curse; last week Portuguese bank issues droves the currency up across the board, but the prospect of Yellen speaking dovishly has lured investors back in to higher yielding assets with the promise of easy money, causing the Yen to fall early on yesterday.