Geopolitics and Central Banks to the Fore this Week

The pound was the best performer within the G10 currency space on Friday. The GBPUSD finally lifted above resistance at 1.2385, and then triggered the short stops above 1.24 andlater near the US close, rose further to close the week at 1.2501. The price did extend a little more overnight, surpassing a technical level at 1.2502, rising to as high as 1.2523 before backing off into the European opening this morning.

I did mention that this GBP rebound could play out and as I also noted, there was some further upside for the EURUSD too. The pair did lift above 1.11 on Friday, but as the day wore on that move simply wasn’t sustained.

This was probably and largely due to cross-currency price discovery which so often gets in the way of the Euro’s momentum in either direction. Well, on Friday it was a combination of GBPEUR rebounding higher and the EURJPY failing to make any headway above 120.00 which created enough EUR outflow to send the price backwards into the close, where it ended only a mere 8 pips higher than itsprevious close.

This kind of price action is exactly what delivers so much consternation to anyone looking for any lasting direction onthe EURUSD in the medium term- a point well demonstrated by the fact that the EURUSD has held largely inside a 1.10-13 range during 2019. This is exactly why a long standing market contact of mine some while back, so aptly referred to it as ‘The Bucket’. That is to say it is the place where all the major cross currency washing gets dumped. That has the effect of making it by far the most liquid of the major pairings; most of the time at any rate, and that’s why it struggles to extend any moves- due the excess liquidity and not the lack of it.

To explain that in more detailed terms; it’s the pair where the aggregator price discovery machines would prefer to leave any risk once they’ve hunted around the houses to trade their way out of any cross pairing such as the EURCHF, EURJPY, EURGBP or for that matter, any of those, and other non EUR counterparty currencies versus the dollar too. So quite often that sends any aspiration of a lasting and trending move on the EURUSD into the same ‘Bucket’. Incidentally, its a bucket that seems to suit some of the larger reserve and sovereign wealth managers though!

The move back up in the GBPEUR did surprise and confound my prognosis for it to have done enough when it reached 1.1254 earlier in the week. So having lifted past 1.1263 at the second time of asking on Friday evening it wasn’t that much of a surprise to see some further gains once that played out. Indeed, the price reached even higher overnight to 1.1298 overnight before reversing again as I write around 6.30am this morning.

Oil Surges Nearly 20% on Saudi News

The news over the weekend that Saudi Arabia’s two largest Oil refineries were attacked by a reported 12 Drones saw WTI and Brent futures prices rise by the most in a session, in percentage terms on record. The wider impact of the news has sent a shiver around the global equity markets and helped the likes of the JPY, the NOK and gold. Prior to this news Gold looked suspiciously like it was going to take out $1480 this week, but that prospect now appears much less likely it would seem.

In terms of the culprit for the attack all fingers are pointing at Iran, who has vehemently denied any responsibility. Cynics out there might conclude that Saudi Arabia has been so desperate to achieve a higher oil price, that they might even have sabotaged the facility themselves! Beyond any conspiracy theories though, the truth is that higher oil prices would certainly suit both Saudi Arabia and Iran.

Meanwhile the geopolitical risks of the US entering into another ME war have surely escalated somewhat and that’s what has really concerned the markets this morning. However, from the latest reports it does appear that the Yemeni Houthi rebels are behind these attacks- a fact which may de-escalate the situation from a US perspective.

In regards to the equity space the Saudi news has again stunted the chances of fresh record highs in the likes of the S+P 500, which reached as high as 3020 on Friday- agonizingly close to its 2019 record high of 3026. Once again I repeat what I said about that last week and I remain highly sceptical about being wrong-footed on this one at such elevated levels.  What this latest news has certainly done though; is to further decouple the hitherto close correlation between the S+P and WTI.

Beyond this latest geopolitical bombshell, it could be a busy week ahead anyway with no less than 4 major central bank monetary policy decisions falling due. The Fed, BOE, BOJ and SNB might all deliver a surprise or two, but if there is one, then its probably most likely to come from across the pond. The current consensus is that the FOMC will lower the Fed Funds rate by 0.25% on Wednesday evening, but if they don’t deliver that, there could be a significant market reaction. My take on that is that whilst a cut is certainly expected and probably baked in to some degree, I am very much keeping an open mind (and book) on such an outcome.

Important Economic Releases/Events Due This Week

17/09- 2.30am Australia- RBA Minutes from September Policy Meeting

17/09- 10.00am Eurozone and German ZEW September Economic Sentiment Index

18/09- 9.30am UK September CPI, RPI and PPI Inflation Reports

18/09- 1.30pm Canada August Annualized CPI Inflation Report

18/09- 7.00pm US FOMC Monetary Policy Decision

(Consensus- Fed Funds Rate Cut by 0.25%)

18/09- 7.30pm Fed Chief Powell Delivers Post FOMC Policy Decision Press Conference

18/09- 11.45pm New Zealand Q2 GDP Revision

19/09- 2.00-3.00am Bank of Japan Monetary Policy Decision

            (Consensus- Policy Rates Unchanged)

19/09- 2.30am Australia August Unemployment Report

19/09- 8.30am Switzerland- SNB Policy Decision

(Consensus- Benchmark Rate Unchanged at minus 0.75%)

19/09- 9.30am UK August Retail Sales

19/09- 12.00pm Bank of England Monetary Policy Decision

            (Consensus 0.75% Base Rate Unchanged)

20/09- 12.30am Japan August National CPI Inflation Report