GBP plunged after the CPI data

We have recently seen positive data from the United Kingdom. Are these signs of recovery reliable? Standard & Poor's recommended to be careful with this prompt recovery. The European Union is making pressure on the May's government to trigger the Article 50. The growing uncertainty around the banking sector in London is driving the executives to think about move part of the labor to an European country. They are facing some problems because they can't find big offices as they would like to. I know that the Bank of England will support the economy and maybe they will extend the contingency program. This is why I think the GBP can look for lows in the coming months.

UK CPI

The UK Consumer Price Index was released this morning showing a lower than expected figure. It was 0.6% vs 0.7%, the difference is not big but all is about expectations. After the released the pound fell. The CPI is one of the most important macroeconomic indicators in Britain. It always move the market. With the current uncertainty of the UK's economy and the worse than expected figure we can understand why the pound is falling vs the American dollar around 163 pips.

Where Does The EUR/USD Go?

Summary

         EUR/USD, two of the biggest economic areas.

         Macroeconomic fundamentals, indicator comparison, GDP, CPI, PMI, Unemployment.

         Technical Analysis, simple moving averages, weighted moving averages, RSI, MACD.

We have seen the EUR/USD between 1.0802 and 1.1616 in 2016. The first half of the year the dollar was weaker than the euro but in the recent months the dollar has strengthened.

   Own elaboration, EUR/USD, daily, 01/01/2015 - 09/08/2016

The referendum in United Kingdom was a inflection point in the financial markets. After it, the dollar USD has performed very well. There are a lot of doubts about the future of the eurozone. A negative outcome of the Italian referendum could break Europe. The US macroeconomic data is strong. We saw a hawkish Fed in its last statement. I think the fed will raise the interest rates before 2017.

Macroeconomic outlook

Let me compare the two economic areas:

I have chosen the CPI, GDP, Manufacturing PMI and the Unemployment rate. The main reason is that these indicators provides us a quick insights about how the economy is performing.

    Own elaboration, GDP Comparison

We can see that the European economy is growing at a slow pace. In contrast the American economy is dynamic.

   Own elaboration, Unemployment Comparison

There is a big gap between the two economic areas. The Europe's main problem is that there are two speed economies (or more) and it's difficult to adapt the economic policy to the different needs. We can see a strong US data. In my opinion the Fed released the economic stimulus at time, avoiding or smoothing the impact of the financial crisis.

    Own elaboration, Manufacturing PMI Comparison

in terms of manufacturing PMI, Europe is doing well and its data is consistent. The US ISM PMI is more cyclical but it's peaking in 2016.

     Own elaboration, CPI Comparison

A growing CPI indicates that the economy is getting stronger, considering normal conditions. We can see a poor EU CPI. This indicates that the risk aversion is really high and everyone is delaying the most important expenditures (like buying a car or a house). Nowadays it's different, the macroeconomic releases don't impact the markets as they used to. Right now the Central Banks move the market.

Technical Analysis

Once I briefly explained the fundamental view, it's time to check the technical analysis. I analyze through R Programming. I modified the data you will see 11200 instead of 1.1200.

    Own elaboration, EUR/USD, daily, 01/01/2015 - 09/08/2016

I'd like to start explaining the color code: the blue line is a 50 SMA, the red one is a 20 SMA, the green line is a 100 SMA, the grey line is a 200 SMA and the orange line is a 20 WMA. We can see the RSI and the MACD under the main chart. The short period moving averages are bellow the 100 SMA (blue line) but they are slightly above the 200 SMA (grey line). The MACD indicates that this par could rebound a little bit. I think that if the price goes under 1.1000, it will look for the lows of the year (around 1.0802).

Conclusion

I think we will see a stronger USD in the coming weeks, so probably the EUR/USD and the GBP/USD will be lower. The American economy is getting stronger while there are some doubts about the future of the Eurozone. The European Central Bank will continue its asset purchases which means a weaker euro. In the case of GBP/USD, the Bank of England started its stimulus measures yesterday. In addition the BoE warned that they can cut even more the interest rates and boost the government bond purchases if the economic downturn in U.K. deepens. 

EUR/USD analysis

I’m going to analize the EUR/USD from the 9th of July 2015. As we can see in the next chart, the USD was bearish vs the EUR, the main reason was the Chinese economy turmoil. During the 4th quarter the USD was stronger than the euro. We have seen a stronger Euro in 2016, but after the Brexit and the growing euro-skepticism the european currency has lost around 3,5% vs the dollar. I think it will keep going down in the next 3 months. Italy will hold a constitutional referendum in October. A negative outcome would bring a new phase of political uncertainty. Italy is one  of the countries with the highest share of population that thinks they would be better off the EU.

    EUR/USD, Daily, 10/07/2016

Considering the macroeconomic environment and how it can affect the different assets, it’s one of the most important skills in financial markets. Sadly, it’s not enough. Keynes said: “the market can remain irrational longer than you can remain solvent”. Let’s check how this pair has behaved this year.

    EUR/USD statistics from 09/07/2015 to 08/07/2016

As you can see in the chart, the mínimum yield was -2.43% and the maximum yield was 3,04%. Mainly the positive mean (0.00256%) is one of the most important figures, it shows that the euro has been stronger than the dollar. The positive asymmetric coefficient shows that the yield’s distribution is skewed to the right. The mass of the distribution is concentrated on the left of the figure but there are more extreme values in the right side. The distribution is leptokurtic, which means that has fatter tails than the normal distribution.
The next two charts are part of the whole analysis, they help to understand the data in the table.

    EUR/USD Daily change


EUR/USD probability of the different returns

Technical analysis
Once you have clear the fundamentals, you can support your trading idea with technical analysis. The color code of this chart is:
• Orange is a WMA (n=10)     Since now I will refer to as WMA10
• Red is a SMA (n=20)             Since now I will refer to as SMA20            
• Blue is a SMA (n=50)            Since now I will refer to as SMA50
• Green is a SMA (n=100)       Since now I will refer to as SMA100
• Grey is a SMA (n=200)         Since now I will refer to as SMA200

I’ve decided to show the RSI and the MACD below the main graph.

    Own elaboration, EUR/USD technical analysis

I only analyze the last 262 days this is why some of the indicators don’t start from the last day. (Note, I analyze  through R programming. I multiplied the rate for 10^4 in order to simplify some of my tasks.)
As I said before I think the value of the EUR will decrease. As you can see in the chart the WMA10 and the SMA20 crossed the SMA50 and SMA100. Aparently, it means that in the short term the EUR/USD will go down.  The SMA50 is decreasing and it wil probably cross under the SMA100 in 1 or 2 weeks. The RSI is low (40.943), so we can see a small rebound but I’m bearish. The MACD is below the signal.
It’s really difficult to forecast the long term, the american elections will be held in November. As we have seen with the Brexit, a political decision can change the world.
This post is not an investment recommendation, it’s my own opinion.

Economic calendar, GBP/USD futures analysis

Maybe is the topic of the week but today I’m going to analize the GBP/USD future, before that I would like to show the most important macroeconomic releases we will see this week:

Economic Calendar

Monday                                                                             Expected    Last

GBP Construction PMI (Jun)                                   50.5        51.2       

Tuesday

GBP Services PMI (Jun)                                          52.7        53.5

Wednesday

USD ADP Nonfarm Employment Change (Jun)     160K     173K

USD ISM Non-Manufacturing PMI (Jun)               53.3        52.9       

Thursday

GBP Manufacturing Production (MoM) (May)       -1.0%     2.3%

USD ADP Nonfarm Employment Change (Jun)     160K      173K

Friday

USD Nonfarm Payrolls (Jun)                                   175K      38K

USD Unemployment Rate (Jun)                               4.8%      4.7%

GBP/USD

After the Brexit, all bankers are concern about the value of the sterling pound. The jittery fx markets are waiting for a clear response from the policy markers. If you remember Mark Carney’s speech, you can think that the monetary easing will devalue the sterling pound. Supply and demand law. Let’s compare EE.UU. with UK:

·         The FED was the first central bank to apply monetary easing after the financial crisis, since then the american economy has improved significantly.

·         UK has been performing really well during the last 2 years, the MPC could have risen interest rates before.

What has happened since the Black Friday?

All things we had in our agendas have blown up. Apparently the market participants speculate that the FED will delay the interest rates rise. The most part of the investors are convinced that the gold’s value will go up. Jim Rogers, famous investor, disagrees with betting on gold as a safe haven. He said that he prefers to buy the USD because the value of the gold is too high.

    GBP/USD, daily, from 23/09/2015 to 1/07/2016

In my opinion, during the next three months, the GBP/USD pair can rebound to 1.35, but after that it will go under 1.30. This forecast is based in fundamental things like the monetary easing and the political uncertainty. After October I prefer to be cautious, and be aware about the UK election. It’s going to be a difficult year having in mind that EE.UU. will have elections on the 8th of November.

This post is not an investment recomendation, it’s my own forecast. I will keep updating this post with statistical analysis.

Sum up of the week, FX, Fixed Income futures

Let me start reviewing the macroeconomic figures we saw this week. We have seen very good data, I’d like to highligh the US GDP, US consumer confidence, EUR manufacturing PMI, GBP manufacturing PMI, US ISM PMI. All of them showed better figures than expected.

                                                                                                    Current  Expected Previous

        US GDP (QoQ) (Q1)                                  1.1%        1.0%      0.8%                     

        US CB Consumer Confidence (Jun)           98.0         93.3       92.4

        US Pending Home Sales (MoM) (May)     -3.7%      -1.1%     3.9%

        German Retail Sales (MoM) (May)            0.9%        0.7%     -0.3%    

        German Unemployment Change (Jun)       -6K          -5K        -10K      

        German Unemployment Rate (Jun)            6.1%        6.1%      6.1%

        GBP GDP (YoY) (Q1)                                2.0%        2.0%      2.0%

        EUR CPI (YoY) (Jun)                                 0.1%        0.0%      -0.1%

        German Manufacturing PMI (Jun)              54.5         54.4       54.4

        EUR Manufacturing PMI (Jun)                   52.8         52.6       52.6       

        GBP Manufacturing PMI (Jun)                   52.1         49.9       50.1

        USD ISM Manufacturing PMI (Jun)           53.2         51.4       51.3

Obviously, the Brexit effect is not reflected in this indicators yet. I’m excited to see how it can affect the different economies.

The governor of the Bank of England has told markets to expect a cut in interest rates and the possibility to implement monetary easing. Having said that, he warned that the monetary policy cannot inmediately offset the implications of a large negative shock. This explains why all the indices closed up this week. In my opinion the most important markets can rise a little bit more, but having in my mind the doubts about China, the Brexit implications, the future of the EU, I think the markets will go down sooner or later. It’s an artificial growth, let me explain my perspective, all the monetary policy applied by the central banks let the stock market raise. There is a lot of complacency in the markets, and events like the brexit creates a lot of volatility and increases the fat tailed risk.

Today, I going to start with the fixed income futures (10Y T-Note and the Bund). As you can think the 10Y T-Note future raised this week.

    10Y T-Note future, 1 day

The Bund’s future has tried to break the 167.27 but apparently there are a lot of traders willing to sell around this level. We should focus in how the situation evolves.

    Bund future, 1 day

FX futures

The EUR raised vs the USD, maybe the main reason of this movement is that the FED won´t raise interest rates at least until August – September. In my opinion the EUR/USD should look for lows, because the US macroeconomic is strong and there is a lot of uncertainty in the eurozone after the decision taken by UK. George Soros warned the European Parliament that the Brexit has unleashed financial crisis and that Europe should be united.

    EUR/USD future, 1 day

Even with the Little rebound in Tuesday and Wednesday, the GBP plunged on Thursday.

    GBP/USD Future, 1 day

The sterling pound plunged against the euro. It’s difficult to make a good forecast, but I think that the GBP will keep falling a Little bit.

    EUR/GBP Future, 1 day

#trading #Brexit #Europe #interestrates #FX #Euro #USD #GBP

What Can we expect this week?

Good morning, let me recap what happened yesterday in the markets. The Sterling Pound fell even more against the USD and the EUR. The growing uncertainty after the Brexit decision is hitting the markets. In addition, Cameron’s resignation doesn´t help at all, at least he will be in the office till October. Chancellor George Osborne said this morning that the UK would have to cut spending and raise taxes.

Europe’s politicians are working hard to address the current situation. By the way, the conservative party (PP) has won most seats in Spain's parliamentary election but is short of a majority, which adds more political uncertainty. Italy is using Brexit as a pretext to unleash a €40 billion ($44 billion) bailout of its insolvent banks. All of these issues are reflected in the EUR/USD.

GBP/USD Futures

GBP/USD Futures, Monthly, 27/06/2016

EUR/GBP

EUR/GBP Futures, Daily, 27/06/2016

EUR/USD Futures

EUR/USD Future, Daily, 27/06/2016

Economic calendar

The  most important macroeconomic release of the week is the US GDP this afternoon (13:30 UK time). It’s expected to be around 1%. After that. At 15:00 we will see the Consumer Confidence, I expect it strong.

    Wednesday:

·                                 -German CPI

·                                 -US Pending Home Sales

    Thursday:

·                                 -German Retail Sales

·                                -German Unemployment

·                                - UK GDP

·                                -European CPI

·                                -Canadian GDP

    Friday:

·                                -China PMI

·         -                      -German Manufacturing PMI

·                                - UK Manufacturing PMI

·                                -US ISM Manufaturing PMI

What I expect?

It’s only my opinion, don´t take it as a financial advice. I expect a little rebound today, but I think the markets will look for lows until the negotiations and the economic measures are clear.

Brexit

EU referendum

The UK has voted to leave the EU. Probably it’s one of the most difficult decisions in our times and it will open up a period of profound uncertainty for the UK and the EU. One of the things behind the referendum was the immigration, as you know, having a visa is not (or it wasn´t) a requirement if you are a European citizen. The EU single market requires free movement of labour. According to the law, UK will leave the European Union by 2019, but there is the possibility to leave before. Theoretically, the UK could also unilaterally withdraw from the EU by simply repealing the 1972 European Communities Act.  In my opinion I don´t think they will do the last possibility because it means that the EU legislation and the free trade agreements would lapse immediately.  Leaving the EU would hit growth in the short term, in addition, the decision taken by the British PM will add even more uncertainty in the political environment.

The major issue is to make a trade deal with the European countries.

                                           Source: Reuters, EU Referendum results by area.

After knowing the decision, David Cameron has resigned. In his speech, Mr Cameron said he would stay in office for three months to steady this difficult situation.

                                          Source: Reuters, David Cameron speech.

Coming back to the markets, in the worst case scenario, no transition period, the British Pound would drop to unexpected levels.

Let’s check how the referendum affected the markets.

GBP/USD

 GBP/USD 30 min 24/06/2016

As I expected the one of the biggest movements today has been the cable. The traders worked the whole night.

EUR/GBP

    EUR/GBP 30 min 24/06/2016

The euro has strengthen versus the sterling. But the Brexit can affect the EU in two ways:

·         It can break the European project.

·         Europe can learn from this situation and work even harder to create a real economic union.

EUR/USD

    EUR/USD 30 min 24/06/2016

As I commented before, the EUR has dropped versus the US dollar, there is a growing uncertainty about the future of Europe. Marion Marechal Le Pen said “from Brexit to Frexit”.

Fixed Income Markets

Bund

    Bund Futures 1 day 24/06/2016

The bund futures opened at 168.48, the main reason of that is the extreme movements in the overnight currency markets. During the day if fell to 165.69.

10Y T-Note

    10Y T-Note Futures 1 day 24/06/2016

The 10Y T-Note future opened without gap but it climbed really quickly to 134.25 . In the second part of the trading day it came down to 132.375 .

I will keep you updated, thanks for visiting this post, have a good day.

I'm back

Good Morning, it's been a long time since my last post. I've been studying and developing even more things with the aim to improve my analysis. I focus in R programming and statistical methods. I'm going to collaborate with Luis Correia Tavares who is an excellent independent capital markets professional. Thank you very much. Have a good day.