Pound bulls are los­ing mo­men­tum, NZD con­tin­ues to fall

Financial Mirror (Cyprus) - - FRONT PAGE -

It was an im­pres­sive rally driven by con­tin­ual USD weak­ness pro­vid­ing up­side mo­men­tum, but it ap­pears that the GBPUSD bulls are fi­nally los­ing steam. The Pound slipped 100 pips against the Dol­lar on Mon­day and while some might be right to sug­gest this could be another con­sol­i­da­tion be­fore the next leg higher, it is more likely a sig­nal that the GBPUSD is be­gin­ning to erase some of the un­ex­pected 600 pip gains over the past fort­night. As men­tioned be­fore, the weak sen­ti­ment to­wards the USD has been pro­vid­ing di­rec­tion for the Pound and the GBPUSD would be vul­ner­a­ble to down­side pres­sures when trader ap­petite to­wards the USD re­turns.

While there are very few who are ques­tion­ing that the UK eco­nomic out­look is not at­trac­tive, we are at least a year away from a UK in­ter­est rate rise and this will con­tinue to limit how high the Pound can ex­tend against the Dol­lar. There is also valid ar­gu­ment to sug­gest that the USD is cur­rently over­sold, es­pe­cially con­sid­er­ing that the Fed­eral Re­serve will be rais­ing US in­ter­est rates over the next cou­ple of months, which I ex­pect in Septem­ber, pres­sur­ing the Pound. This also means that any GBPUSD up­side be­yond 1.60 would be am­bi­tious un­less UK in­ter­est rate ex­pec­ta­tions are pushed for­ward and if it were to oc­cur, it would more likely be mo­ti­vated at this stage by wide­spread USD weak­ness.

Global mar­kets ral­lied on the in­creased prospects of a deal be­tween Greece and its cred­i­tors. The im­proved mar­ket sen­ti­ment stretched glob­ally with NAS­DAQ clos­ing at a record level, and both the Ger­man DAX and FTSE 100 surged to the up­side. If re­cent history is any­thing to go by, there are likely to be a few more twists and turns be­fore a deal is con­cluded but this is at least a pos­i­tive sign. The strong gains in global mar­kets shows how much in­vestors want a deal to be reached and ev­ery­one would much pre­fer it to be this way, rather than for the un­cer­tainty over a loom­ing de­fault. One of my great­est con­cerns over this on­go­ing sit­u­a­tion is that mar­kets have not priced a de­fault in the slight­est and the po­ten­tial global im­pli­ca­tions of such an event re­main un­clear. This is a risk all in­vestors would want to avoid.

The Euro man­aged to re­bound against the Dol­lar on op­ti­mism that progress on a Greek deal is fi­nally be­ing reached with a va­ri­ety of re­ports emerg­ing that Greece sub­mit­ted new pro­pos­als to Eurogroup of­fi­cials. This pushed the EURUSD marginally above 1.14 but as we have re­peat­edly seen over the past few weeks, there are traders out there that see this as a sell-on rally op­por­tu­nity and the pair wasted lit­tle time in once again pulling back quickly to 1.1320. Un­til the Euro man­aged to sur­pass what many see as su­per strong re­sis­tance against the USD at 1.1450, gains for this pair ap­pear capped. If you are a Euro buyer, chances of gains in the short-term against the Pound are more likely than against the USD.

De­spite the con­tin­ual mixed sen­ti­ment to­wards the USD, the NZDUSD con­tin­ues to fall with this stat­ing a great deal about the weak at­trac­tion to­wards the NZD fol­low­ing the un­ex­pected in­ter­est rate cut from the Re­serve Bank of New Zealand (RBNZ) a week ago. Af­ter the ini­tial in­ter­est rate cut, eco­nomic per­for­mances from the New Zealand econ­omy sug­gest that the pres­sure will re­main on the RBNZ to con­tinue cut­ting rates. This is quite a con­trast to the spec­tac­u­lar rally the cur­rency en­coun­tered this time last year, but the eco­nomic sen­ti­ment has changed and in­vestors are pric­ing in fur­ther declines. The NZDUSD has now sunk be­low the psy­cho­log­i­cal 0.69 sup­port level, which is likely go­ing to lead to a fur­ther down­side to­wards 0.66 at some point in the fu­ture.

Although WTI crude has ad­vanced back above $60, the lack of gains for this com­mod­ity de­spite the weak sen­ti­ment to­wards the USD demon­strates that there are lim­ited buy­ers in the mar­ket for WTI. This is no ma­jor sur­prise con­sid­er­ing OPEC left pro­duc­tion lev­els un­changed a fort­night ago and you would ex­pect there to be hes­i­ta­tion from in­vestors to en­ter new po­si­tions as a re­sult of that. While re­duced trade sur­pluses from the U.S. are be­com­ing a reg­u­lar fix­ture of the weekly in­ven­tory re­ports, it is clear in­vest­ment in oil pro­duc­tion from OPEC mem­bers is in­creas­ing and this will off­set re­duced in­ven­tory from else­where.

Con­cerns over there be­ing an over­sup­ply in the mar­ket has been a dom­i­nant theme when it comes to dis­cussing oil for a year now and it will not be chang­ing any­time soon, which will also con­tinue to weigh on in­vestor sen­ti­ment. OPEC sup­ply is now at its high­est level since Au­gust 2012 and with the to­tal rig counts in the U.S. de­clin­ing at their slow­est rate since De­cem­ber at the end of last week, mar­kets are re­ceiv­ing fur­ther con­fir­ma­tion that low oil prices are set to stay.

Mar­kets Re­port b

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