Month: October 2018

The pound depreciated at 1.2698 (- 0.68%) against the dollar yesterday. While the negotiations on Brexit between the Theresa May government and the European Union are still stalled, with the “no deal” hypothesis that gets more and more probable every day, the issue linked to the Northern Irish border is catching on , with the loyalists who urged the Irish government to stop the “” British rejection “” on Brexit, launching the alarm on possible attacks in the case of “hard Brexit” that could severely test the ties between Northern Ireland and Dublin .

The Bank of England kept interest rates unchanged during its last monetary policy committee, after Governor Mark Carney was confirmed at the head of the central bank until the end of January 2020 to mitigate any potential negative fallout from Brexit.

The Federal Reserve raised US interest rates by +25 basis points during the FOMC meeting on September 26 and should again increase rates during the last FOMC of the year. After the latest macroeconomic data showing a good labor market, with the unemployment rate at 3.7%, the GDP growth rate rising by + 4.2% on a quarterly basis and the inflation towards the + threshold 3.0% on an annual basis, the Fed’s monetary position should become more aggressive. The latest COT Pound Report, published by the Chicago Mercantile Exchange referring to the Positions Futures as of October 23, shows how leveraged funds reduced their long and short positions on the GBPUSD and how dealers strongly increased their long positions.

The COT reports all long and short positions for each category of investors: dealers, asset / institutional managers and leveraged funds. In particular, leveraged funds include hedge funds, which represent the most tactical and dynamic investors, characterized by greater flexibility to move from long positions to short positions (and vice versa).

According to the COT data referring to the last week of trading, the leverage funds decreased to 29.021 their long positions for contracts of GBP 62.500 (-2.962) and also decreased to 38.563 their short positions (-1.192), with a spread of 8,960 (+2,757). The dealers strongly increased their long positions by +9.732 to 102.873 and increased their short positions by +2.454 to 29.838, with a spread of 2.011 (-449), suggesting that this category of investors is likely to strengthen pound against the dollar in the long run. Even the asset managers / institutions increased their long positions to 49,813 (+1,041) and increased their short positions to 90,494 (+4.997), with a spread of 2,715 (+6).

Investors bet up to a maximum of 5 interest rate hikes by the Fed this year, according to the CME’s FedWatch tool. The FedWatch calculates the probabilities assigned to a spectrum of target interest rates for all upcoming FOMC meetings. The implied probabilities of possible Fed Fund target rates are based on the prices of Fed funds futures contracts, assuming that the rate increase is 0.25% (25 basis points) and that the Fed Funds Effective Rate (FFER) react for a similar amount. Implied probabilities related to FOMC meetings are determined by futures contracts, as reported by the CME Group.

For the FOMC meeting on November 8, investors attribute a 94.8% probability that the Fed Funds will be in the current range of 200-225 basis points, up from 93.5% in the previous week and a probability of 5.2% ranging from 225 to 250 basis points, down from 6.5% the previous week.

For the last FOMC meeting of the year (December 19), investors attribute a 26.2% probability that interest rates will be in the current 200-225 basis points range, up from 13.0% of the previous week, a probability of 70.0% that are in the range of 225-250 basis points, down from 81.4% in the previous week, and a probability of 3.8% that are within the 250 range -275 basis points, down from 5.6% the previous week.

Finally, for the first FOMC next year (30 January), investors attribute a 25.1% probability that interest rates are in the current range of 200-225 basis points, up from 12.4% of the previous week, a probability of 68.1% that are in the 225-250 basis points range, down from 78.5% the previous week and a 6.6% probability falling within the 250-275 range basis points, down from 8.9% the previous week.

Therefore, this week the probability spectrum has moved towards a scenario of less aggressive increases compared to last week.

The euro rose to 1.1403 (+ 0.25%) against the dollar on October 26, at the end of a week that saw an increase in tensions in the sovereign bond and stock markets, triggered by the massive stock sell-off registered in Wall Street, mainly related to the shares of the hi-tech business companies.

The Governing Council of the European Central Bank is ready to end the quantitative easing program, starting from January 2019, after a progressive reduction of 15 billion a month, starting from October. The Euro zone CPI index rose to + 2.1% in September, against a surge in energy costs, while the fluctuations in underlying prices remained more modest, with core inflation declining to +0.9 %. The Governing Council of the European Central Bank is ready to end the quantitative easing program, starting in January 2019, after a progressive reduction of 15 billion a month, starting in October.

The Euro zone CPI index rose to + 2.1% in September, against a surge in energy costs, while the fluctuations in underlying prices remained more modest, with core inflation declining to +0.9 %. The Governing Council of the European Central Bank is ready to end the quantitative easing program, starting in January 2019, following a progressive reduction of 15 billion a month, starting in October.

The Euro zone CPI index rose to + 2.1% in September, against a surge in energy costs, while the fluctuations in underlying prices remained more modest, with core inflation declining to +0.9 %. Governor Mario Draghi said that the ECB’s Quantitative Easing was “very effective”. Draghi, recognising the recent weakening of the euro area economy, also spoke about what defined a “bunch of uncertainties” linked to trade protectionism, to the risk linked to emerging markets and the volatility of financial markets. He also said that the euro zone monetary union remains “fragile”. The Federal Reserve raised interest rates in the United States by +25 basis points during the FOMC meeting on 26 September last and a further increase is expected for the last FOMC of the year (19 December). After the publication of the latest macroeconomic data that showed the extraordinary increase in the quarterly GDP growth rate, a solid labor market, with the unemployment rate dropped to 3.7% in September, and the rate of inflation still above + 2.0%, at + 2.7% in August, the Fed’s monetary position should become more hawkish.

The Fed’s Kaplan said the “neutral” interest rate for the US economy is between 2.5% and 2.75%, suggesting that the central bank could increase the fed funds another 3/4 times before. According to the COT data referring to the last week of trading, leveraged funds increased their long positions of +3.307 to 30,236 units and strongly increased their short positions of +11.238 to 123.394 units, with a spread of 8.261 (-662 ). The dealers have strongly increased their long positions of +7.788 to 34.236 units and have reduced their short positions of -4.831 to 93.885 with a spread of 10.470 (+4.248), demonstrating to bet on a long-term depreciation of the dollar against euro. The money managers / institutional investors have increased their long positions (+1.211) to 278.532, which are still far from the historical peak of last January, and their short positions (+7.509) have risen to 149.999. spread of 22.090 (-1.362).