For the week ending Friday, 21 July 2017, the FTSE 100 index was trading at 7,442.82, down 0.60% or 45.05 points. The movement of the FTSE 100 index, the UK’s all-share index, is inversely correlated to the strength of the GBP. The cable (GBP/USD) is currently trading at 1.2991, up 0.12% or $0.0015.
The sterling has shown surprising robustness in the face of mounting pressure in the UK economy. Over the short-term, there appear to be multiple indicators of bullish movement with the GBP/USD, as evidenced by the current level of trading.
The key support level of the GBP/USD is 1.300. The sterling has found it rather difficult to maintain that level, and tracked lower against the dollar. There was a reversal towards 1.299 after recent UK finance data was released. The June data for public-sector borrowing in the UK is higher than forecast, and will likely drive the sterling above the 1.300 handle.
The June public sector net borrowing figure was £6.3 billion, down from £6.4 billion in May. Analysts were anticipating public-sector net borrowing of £4.2 billion. Over the past week, the cable has retreated sharply from its 1.311 highs, beneath the critical 1.300 support level.
Trading the Cable
Currency traders are expecting the GBP/USD to reverse course in the final week of July. There are some positive sentiments evident in the UK economy, notably strong retail sales growth in Q2, after a rather lacklustre start to the year. The biggest concern for the UK economy is the issue of a hard Brexit. If Prime Minister Theresa May’s government is unable to secure a negotiated settlement with the EU, Britain may exit the European Union without any framework in place.
This would hamper trade and investment in the UK and weaken the GBP. Brexit secretary David Davis is determined to hammer out a deal with his EU counterparts, however UK international trade secretary, Mr. Fox believes that the UK can survive without a deal in place. These geopolitical uncertainties weigh heavily on the performance of the GBP and the FTSE 100 index.
Trade-24 expert, Liam Helms believes that UK investors and traders should look to economic matters across the Atlantic,
‘… All the hullabaloo taking place in United Kingdom can cloud your judgment as a trader. Prime Minister May is hanging on by a thread, and Brexit negotiations are going nowhere fast. However, it’s imperative that we look to events unfolding in the United States for greater clarity about trading activity.
The bellwether on the horizon is the Federal Reserve Bank. If the FOMC signals its intent to raise interest rates, this will boost the USD, weaken the cable and drive capital flows from embattled markets and emerging markets to the US. Currency traders should be carefully eyeing the Fed’s decision in coming days.’
Fed Rate Hikes
The latest CME Group forecasts indicate that the likelihood of a rate hike on Wednesday, 26 July 2017 is just 3.1%. For September 20, 2017, the likelihood of a 25-basis point rate hike is 8.2%, and for 1 November 2017, the probability of a 25-basis point rate hike in the region of 1.25% – 1.50% is just 9.9%. These low probability figures indicate that market participants are not expecting the Fed to act anytime soon. We may be done with rate hikes until 13 December 2017, where the current probability of a 25-basis point increase is now at 45%.
When the Fed acts, markets will react. Currency traders will buy USD and sell GBP ahead of a likely rate hike, but US equity markets may not be as accommodating. Fed rate hikes also impact demand for dollar-denominated assets like gold, silver and platinum. For now, the Fed is adopting a go-slow approach, much like the Bank of England. This monetary posturing will continue as long as market uncertainty prevails.