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Sterling’s April Roller Coaster Ride

GBPUSD started the month just above 1.40, rallied up towards a two-year high just below 1.4350, before giving up all of those gains last week, to trade below the psychologically significant 1.40 level. This week we will explore the factors that initially drove GBP back above pre-Brexit levels, the reasons behind the subsequent reversal, and why we are comfortable retaining our non-consensus bearish bias on GBPUSD.


The main short-term driver of GBPUSD has been the level of expectation of a Bank of England rate hike next month.  The market-implied probability of a May rate hike climbed relentlessly during the month, and in effect a May rate hike was largely priced in by last week (see chart I).


Chart I: Market-implied probability of UK change in interest rate (May)


Source: Bloomberg / The Daily Telegraph


However, Mark Carney’s comments on Thursday night about ‘mixed data’ and the ‘differences of view’ at the Bank of...

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The storm on the horizon

At first glance, last week was another quiet five days for the currency markets. GBPUSD barely deviated from 1.40 – 1.41, EURUSD was stuck between 1.2220 and 1.2320 and USDCAD traded a tight range between 1.2750 and 1.2900. This was despite a plethora of data from both sides of the Atlantic, coupled with Trump and Chinese authorities exchanging blows over trade. In this week’s report, we consider two reasons why this state of calm may not persist…


Non-Farm Payrolls

Friday’s US employment report showed a disappointing 103,000 new jobs created in the March, undershooting expectations for 185,000. Unsurprisingly, the dollar came under immediate pressure against both the pound (see chart below) and the euro, losing around a cent against each, but most commentators seem to have shrugged off the disappointing headline number and instead decided to focus on an increase in average earnings and an upward revision to February’s reading.


Chart 1: GBPUSD...

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Q1 Review – Equity market volatility fails to infect FX markets (for now)


The first quarter of 2018 was a shaky one for equity markets, and the start of the second quarter has been even more concerning, as highlighted in the above chart.  The S&P 500 is now down by more than 10% from its January high, and the VIX (the equity market’s ‘fear gauge’) has pushed back above 20, (which has become the de facto dividing line between a complacent market and an anxious one).


There are other worrying signs which point towards a growing risk that we are at, or near the end of the economic cycle.  Recent analysis by Bianco Research LLC has shown that the proportion of ‘zombie’ companies in the S&P 500 (companies whose earnings (EBIT) fail to cover their interest expense) is at the highest level this century at 14.6%.  In addition, the percentage of IPOs with negative earnings in 2017 reached 76% according to a study by...

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