By: Kevin Sollitt
Trading is likely to be somewhat subdued in North America on Wednesday due to partial market observance of Veterans’ Day.
European markets however will be firmly focused on the Bank of England’s quarterly inflation report and employment data, both of which are due for release on 11/11. The recent tendency towards surprise outcomes has been for the inflation report to contain a more hawkish bias, despite the obvious downturn in the UK economy.
Today’s warning by the ratings agency Fitch that the UK is the closest among the big four global economies to losing its AAA sovereign rating perhaps gave a clue to the vulnerable side of the cable cross, the market selling off sharply by almost a couple of cents.
The pound later recaptured as much as one percent of its worst levels against the USD, perhaps not least due to some positive or as we see it hopeful sentiment developing that tomorrow’s inflation report may contain another hawkish surprise. This of course is quite possible; however given cable’s 10-cent appreciation over the past month combined with the failure of EUR/USD to break through what are reported to be sovereign-type offers and option barriers in the 1.5025 region, cause for pause is also provided.
So we prefer to look at this argument from the other side of the coin: if the BoE stance were to be hawkish tomorrow or in other words very much influenced by concerns over inflation, then surely the bank would not have engaged in another bout of QE as recently as last week flooding the market with money and furthermore would not be encouraging public opinions that more may be on the way.
To the point, we think the most likely outcome based on recent official action and comments are for a dovish outcome to tomorrow’s inflation report which could then open up the trap door for GBP crosses, particularly against the USD. As discussed in yesterday’s article, the market has become so obsessed with selling USD at any price that for us, at least for now, the value trade is now skewed for a higher USD and as GBP would seem to be ripe for a correction, this makes cable the perfect value trade for a view of this nature.
A long market fuelled by speculation and hope, in the face of resistance levels being rejected at recent highs and among floundering fundamentals, given the UK’s very, very weak fiscal position, hence threats of downgrade.
Trade idea: Sell 1 unit at market 1.6740, 1 more at 1.6860, stop-loss on a close above 1.6910, objective 1.6260 t/p. Risk reward approximately 5:1.
Good trading.