Published On: Tue, Jun 6th, 2017

Tips for Trading the Sterling in June

The Cable is currently trading at 1.2913, buoyed by the weakness of the USD. The relationship between currencies is often nonlinear in nature. For example, the performance of the US dollar is heavily influenced by the 6 currencies that make up the DXY. These include the CAD, JPY, SEK, CHF, GBP, and the EUR. The US dollar index is a broad measure of the performance of the greenback vis-à-vis these 6 currencies. A cursory look at the DXY would imply that each currency has an equal weighting, but that’s not the case. The EUR is weighted at over 57% of the DXY. Since the euro zone is the biggest trading bloc in the world, what happens with the European Central Bank, European elections, and the EUR is paramount.

Dollar Bulls Retreat as ECB Governing Council Weighs In

We recently saw some surprising data coming from the ECB. There are mounting concerns that US stocks, and the USD, will crash when the European Central Bank decides to reverse course and start tightening monetary policy. The ECB head, Mario Draghi has been hinting at reversing monetary policy. Presently, the ECB is printing €60 billion per month. The critical date for any changes to current monetary policy in Europe is June 8.

That’s when the ECB’s Governing Council will announce its policy decisions. June 8 is also the date that the UK will hold a general election. For USD bulls, the pressures are mounting. The recent level of the DXY is 98.30 (May 16, 2017), and what is important about this current level is that it is dropping. The 1-month performance of the US dollar index reflects a decline of 1.22%, and for the year to date, the DXY is down 3.99%. This naturally affects the trading levels of the cable and all other currency pairs including the USD.

photo/ screenshot YouTube

Effective Ways to Trade the GBPUSD Pair

Currency traders at Saxon Trade are hedging their bets on the short-term bullishness of the sterling. Recent US economic data releases from Q1 2017 were lacklustre. And with Q2 2017, GDP results slow out of the blocks many currency traders are giving the USD a wide berth. The EUR is the best performing G10 currency for the month of May and it’s largely due to the expectations of monetary policy with the ECB. The Eurozone economy is growing and there is a sense that the collectivist mindset of the remaining 27 members of the EU will remain in place after the French presidential election. The latest economic indicators suggest that the ECB will continue to print money at the current rate through December 2017. The volatility in the markets is evident in commodities markets, notably gold. Gold typically retreats when a risk-on approach to equities is in effect. We are seeing the gold price strengthening as the USD weakens, since it’s a dollar-denominated asset. As the greenback falters, so traders take to gold.

But experts are confident that the ECB will curtail expenditure when it meets in June. If pundits are right, the rate hike could take place within the year. A reversal in monetary policy by the ECB will invariably impact the USD and Wall Street in a big way.  The Q1 quarter-on-quarter growth of the EU economy was measured at 0.5%. With Q2 growth already showing strong signs, momentum is clearly strong. ECB president Mario Draghi pointed to the decrease in downside risks and that is likely to spur a reversal in policy. Currency trading experts believe that by September 2018, the ECB could reduce asset purchases to a monthly figure of €40 billion.

Barclays Weighs in on UK Economic Growth

Barclays has had a tough time on the FTSE 100 index. The UK bank remains on a stable footing, but Barclays is under pressure to perform with its dividend policy. The Capital Forex Strategy Research division at Barclays believes that the short-to-medium term trends for the GBP will continue to appreciate. The sterling is likely to show strong signs of growth as core inflation in the UK is set to rise and retail sales are on the up and up. The GBP/USD pair has certainly dovetailed with expectations and is on the ascendancy.

Author: Pankaj Deb

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