Cable falls below 1.2200 as pound pares some of its overnight gains

GBP/USD falls to a session low of 1.2195

GBP/USD H1 23-08

The pound is losing some further ground in the European morning with cable now threatening to slip back under the 1.2200 handle. Price has fallen to a session low of 1.2195.
As mentioned earlier, topside resistance remains at the 50.0 retracement level @ 1.2267 and that remains the risk for sellers. Meanwhile, the risk for buyers is if price holds a break back below the 1.2200 handle.
If we do see such a move, it will open up a test towards the 100-hour MA @ 1.2155 as well as potentially the 200-hour MA @ 1.2124.
There isn’t much driving the move lower here but as highlighted in the earlier post as well, Merkel’s comments isn’t exactly a major game-changer to the Brexit equation – not when it isn’t back by concrete solutions to the Irish border still.

ICYMI – Warnings of turmoil in markets if the US intervenes in the Chinese yuan

The Financial Times ran a piece overnight canvassing potential US intervention to drive the USD down against the Chinese currency.

The background to this is
  • strong, and stronger USD, despite the Fed’s rate cut
  • The US naming China as a currency manipulator
  • USD/CNY and USD/CNH moving above what was though as a bit of a ‘line in the sand’ at 7 (wheter it is is/was or not remains to be seen)
  • Plenty of chatter and speculation that the US admin could intervene to send the dollar lower
Via the FT:
  • One senior staffer at a London-based Chinese bank said the US could conceivably intervene in the offshore renminbi market, where the currency is traded more freely than on the mainland. But the consequences could be serious.
  • “If you take on China on the currency . . . it would be interpreted as a political act and it would throw markets into turmoil,” said the senior staffer, speaking on condition of anonymity. The political fallout would be “unprecedented”, the person added.
He says market turmoil likes that’s a bad thing? 😀
(Off to the naughty corner for those thinking what I’m thinking!)
FT piece is here, may be gated

Stay tuned for the Jackson Hole agenda – due at 0000GMT

The Kansas City Fed will give us the guide to what is ahead at 6pm local time, which is 8pm east coast US and midnight GMT.GMT.

  • The big guy, Fed Chair Powell we know will speak on Friday August 23, the topic will be on monetary policy challenges.
  • at 1400 GMT

US stocks mixed as attention turns to Fed

US stocks were mixed as Federal Reserve officials cast doubts on further rate cuts and a reading on domestic manufacturing stoked concerns over the health of the economy. The S&P 500 ticked 0.1 per cent lower after drifting between gains and losses, with investors turning their attention to the central bank’s annual summit where chairman Jay Powell will speak on Friday. The Nasdaq Composite was down 0.4 per cent, while the Dow Jones Industrial Average rose 0.2 per cent on a rally in shares of Boeing. Central bankers from around the world have descended on Jackson Hole, Wyoming, for a policy symposium that is closely watched by investors seeking clues on monetary policy.

Market participants are looking for the Fed to follow its July rate cut with another one in September, but at the start of the Jackson Hole gathering on Thursday, Philadelphia Fed president Patrick Harker and Kansas City Fed president Esther George indicated in television interviews that they would not back further cuts. “My sense was we’ve added accommodation, and it wasn’t required in my view,” Ms George, one of two dissenters in the July decision, told CNBC. Mr Harker, who is not a voting member of the Fed’s policy setting committee, said he believes the federal funds rate is around its neutral level, adding: “I think we should stay here for a while and see how things play out.” The US 10- and two-year yield curve inverted for the second time this week following the remarks. The yield on the benchmark 10-year Treasury rose 3.3 basis points to 1.6097 per cent, while the policy-sensitive two-year yield was up 4.5bp at 1.6141 per cent. An inverted yield curve is considered a sign that investors expect a recession.

Goldman Sachs best US recession hedge is short USD/JPY

Client note from GS overnight, in summary:

  • A global recession is likely to see falling US yields alongside falling US stocks
  • USD/JPY the most likely pair to weaken
GS cite
  • US/yen falls during risk-off periods as investors move into the safe-haven yen
  • BOJ yield curve control policy fixes nominal yields in Japan, thus a US yield fall makes a more favourable Japan / US differential
(hmmmm …. the BOJ have allowed JGB yields to drift lower …. and regardless, while the differential might improve as GS suggest its still positive for US assets. Anyway, back to GS … )
  • not expecting a global recession in the near term
  • but do not a a drop in activity ex-US
Other trades GS like in the event of a global recession when US stocks drop:
  • long AUD/CLP, EUR/PLN,
  • short NOK/SEK, EUR/CZK and EUR/CAD

EUR/USD forecast to 1.10 before the end of the year (might be a little quicker than that though ….)

A forecast for euro against the USD to fall to 1.10 before the end of this year.

Well, yeah. Not like there is far to go.
The forecaster, to be fair, has been calling it lower from a lot higher than here. After 1.10:
  • Rabo then expect it to trade to 1.15 on a 12 month horizon
Say the moves in Germany could prove supportive:
  • perhaps the German government will bow to calls of a fiscal belt loosening has breathed a little support into the EUR
On the European Central Bank:
  • In September it is likely that the outlook for the Eurozone and the reactions of the ECB will be instrumental in determining the direction of EUR/USD
On Italy:
  • the market has reacted well to the assumption that Italy could avoid a snap election and another budgetary battle with the EU in the near term
  • Italian politics combined with Brexit risks remain potentially negative factors for the EUR
On the Fed:
  • our expectation that the pace of Fed rate cuts are likely to accelerate in 2020 suggest that there is still scope for EUR/USD to head a little higher medium-term and we maintain our forecast of 1.15 on a 12 month view

US stocks erase yesterday’s declines (and then some) and close with decent gains

Ignores the 2-10 going negative again

The US stocks erased the declines from yesterday (and then some). The gains also ignored what was a flattening of the yield curve to flat 2-10s again (although positive now by a basis point or two).
The final numbers are showing:
  • The S&P index +23.92 points or 0.82% at 2924.43
  • The NASDAQ index of 71.646 points or 0.90% at 8020.20
  • The Dow industrial average of 240.29 points or 0.93% at 26202.73.
Below is a summary of the % change high/% change low/% change close for the North American and European major indices.  Most European indices had an even better day.
Ignores the 2-10 going negative againBelow are the changes and ranges for the US debt curve (from 2-30 years).  The 2-10 spread is 1.53 bps currently, down from 4.32 bps at the close yesterday. The thing about today’s move is the yields are higher across the board with the shorter end up more due to the taking out more of the 50 BP cut idea.
US yields are higher with a flatter yield curve.