The Pound has performed completely in line with expectations since the week commenced with the Pound/Dollar suffering heavy losses after tumbling all the way from 1.45 to 1.42. We expected heavy pressure on the Pound/Dollar this week after the currency pair failed to close above the 1.4550 level late last week, with this being what technical traders like myself have used as a possible pivot point to predict the next possible direction for the currency pair. We think that the Pound might now begin to slowly recover some losses against the Dollar especially after the news today that UK wages are expanding, but we don’t see this trend lasting because the sentiment towards the UK economy in itself is still being dragged by persistent inflation weakness.
We still hold negative views on the British Pound regardless of how sudden the currency has declined over the opening period of 2016. There are quite simply too many different factors that are going to impact on investor attraction towards the British Pound on an ongoing basis with this including emerging concerns over a likely decline in economic growth, a never-ending stretch of interest rate expectations being pushed back further and further, and also more alarmingly questions remaining unanswered around whether a possible “Brexit” referendum could still take place later this year. The ongoing “Brexit” uncertainty is a real concern because there are so many risks that the UK markets and currency could face over such a huge event that has basically had too many unanswered questions for far too long.
I see huge risks to the UK markets if a vote is announced due to the simple possibility that it is really likely that corporations will begin to announce or speculate on whether they could, or would not vacate their premises in the UK if the United Kingdom were to leave the EU. This is just one of the reasons why I still see risks to the UK markets and I am not even beginning to think of the stronger and more real risks that would come with a possible “Brexit”, with one simply being what the market reaction would be if there was a threat that the UK could leave the EU. This is the ongoing threat but for the meantime investors might still be thinking about the inflation reading from yesterday as well, where a 0.3% rebound over the past 12 months was not met with enthusiasm. The reason for this is because we are still a dramatic distance away from the Bank of England’s (BoE) 2% inflation target and depressed inflation readings are here to stay in the UK economy for a significant period of time.
WTI oil still below $30
After falling heavily following the complete confusion over what a production “freeze” actually means to the outlook of oil over the longer-term, WTI is trying to recover losses so far today but it appears to be finding stubborn resistance at $30. If I am being honest, the reported “illogical” comments from Iran over whether it will join this “allegiance” sums up the whole situation best because most are confused over what a production freeze truly means. The markets did not react positively to the breaking news from yesterday because with output from most oil producers being around record-levels anyway, these producers are basically still content for the aggressive oversupply to remain and for depressed prices to continue.
The OPEC strategy still appears to be aimed at squeezing away production from elsewhere and regaining market share as it stands, which might also be why some members are only willing to freeze production at current levels, rather than provide the cut to output that purchasers of oil are really looking for. It does also appear that OPEC wants to also collaborate with non-members to achieve a stronger price with this being hinted again yesterday following the unexpected comments from Saudi Arabian Oil Minister, Ali al-Naimi back in December last year where he expressed that any possible change in production level would have to be agreed between both OPEC and non-OPEC committee members.
Yuan weakens despite recent PBoC action
Despite the People’s Bank of China (PBoC) beginning the week by providing confidence to investors by strengthening the Yuan, it does look like the currency weakness is going to continue as the currency looks to be moving lower against the dollar for the second consecutive day. There are some real concerns domestically around official media that capital outflows are still a risk, and that the Yuan depreciation expectations will accelerate further capital outflows in 2016. These ongoing concerns truly put the PBoC in a tricky position when deciding where to set the reference rate for the Yuan because the central bank clearly want to weaken the currency at their own pace, but this at the same time is a major concern for capital outflows that is emerging as another risk for an economy that is already encountering a deep decline of economic growth.
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