By Jameel Ahmad, Chief Market Analyst, FXTM
Although GBPUSD advanced two days ago on a slightly improved UK GDP revision, gains were short-lived and the pair has since dropped 200 pips to a two-week low of 1.5588. Bank of England Governor Mark Carney weakened investor sentiment towards the Pound by announcing that the UK economy is exposed to pressures over the Greece situation. While the BoE Governor said that the direct exposure is “minimal”, his comments confirmed that the UK economy can be impacted by Greece which encouraged selling in GBPUSD.
One of the major drivers behind the GBPUSD rally at the end of last month was USD weakness. It is natural that the pair will be vulnerable to downside pressures as the USD picks up momentum, however any negative comments about the UK economy will also inspire declines. Any rallies in GBPUSD are seen as attractive selling opportunities and considering that the Federal Reserve will be raising US interest rates over the next couple of months, this further strengthens views that the GBPUSD is vulnerable to downside pressures.
On interest rates, it is highly unlikely that the BoE will begin raising UK interest rates any time soon and at least not until the second half of 2016. Due to the attractive UK economic outlook, we continually talk about the need to begin moving UK rates, but what many don’t realise is that UK inflation prospects remain extremely weak. This eliminates interest rate expectations when you consider that the BoE is arguably the strictest central bank when it comes to accessing inflation expectations.
Also, if Carney can talk down the Pound by stating the UK’s financial stability has worsened due to the Greece crisis, we should also take into account what the views of the BoE would be if an EU referendum were to be announced. While the chances of a Brexit in the future are slim, a referendum announcement would result in further hesitation from the BoE to begin raising rates. All in all, gains in the GBPUSD are capped and in many ways limited to USD weakness until clarity is received over when the BoE can realistically begin tightening policy.
WTI OIL: WTI Oil has fallen to a two and a half month low of $56.68 and if this downside pressure continues, the commodity may return to the low $50s. Investor sentiment is continually plagued by oversupply concerns, and this is going to remain a dominant theme when it comes to discussing the oil markets for at least the remainder of the current year. Oversupply concerns intensified again on Wednesday, when the previous comments from the Energy Information Administration (EIA) that US inventories are still rising, were validated by a surprise increase in inventories for the first time in nine weeks.
GOLD: Despite the continual uncertainty over the situation in Greece and subsequent increased market volatility, there are no signs of increased appetite for Gold. You would expect improved demand for safe-haven assets in events such as the Greece crisis, but this has not occurred and suggests that there is great hesitation from investors to consider buying Gold as we approach the timing of a US interest rate rise. With US economic data continuing to improve, the weak outlook for Gold is confirmed as US data provides assurances that the Fed will raise interest rates.
Although Gold has already declined $20 this week, there is room for further downside potential with this being even more the case if Thursday’s US non-farm payroll data impresses. Job creation is the star performer of the US economy and if the NFP provides further confirmation that we should expect a rate hike in the next few months, we will likely encounter a USD rally which would in turn inspire further declines in Gold.
SILVER: Gold is not the only metal to have suffered this week, with Silver also experiencing heavy pressures. Silver declined to a three-month low of $15.42 just a day ago but in comparison to Gold, the downside movement in Silver is due to the improved US economic data. The correlation between improved USD demand and consequent losses in Silver are not as strong as the case with Gold, and what might be causing the declines in Silver is continued uncertainty over the health of the global economy. While the US outlook is strong, we have received two global economic downgrades over the past month. On top of this, declining momentum in China continues and is causing concern while the recent data from Europe has also suggested momentum might be sluggish.
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