Wednesday, November 26, 2014

A weekly engulfing candle in Sterling? | Constancio adds to ECB sovereign bond talk

Today is Thanksgiving in the US. This will mean a thin market in Forex. Apart from that we wish all our US friends, and indeed everyone else, all the compliments of the day.

For the first time since the start of the latest dominant trend in Cable (GBPUSD), which is downward, it looks like a weekly engulfing candle in the opposite direction might be in formation (see chart above). Sterling has now risen each day since the start of this week, which is itself effectively shortened by the Thanksgiving holiday in the US today.

It is as yet too early to be definitive about this, but the incipient signal is worth paying attention to. In terms of the fundamentals, we have always taken the view that the economics of the UK are sound. The pound has been subdued since the run-up to the Scottish independence referendum, and this has been, frankly, on the back of confused messages from the authorities about the imminence or otherwise of core interest rate rises.

Now a delay in such rises may have been well and truly priced in. If this is so it leaves a move up as the only real prospect for the UK unit. This has the potential to be an accelerated one when and if the chatter about rate rises resumes.

Constancio adds to ECB sovereign bond talk

Vitor Constacio, Vice President of the European Central Bank,(who can be seen in his monthly press conferences sitting alongside Mario Draghi) has added his voice to those who seem to be preparing the ground for the purchase of sovereign bonds by the ECB next year, as a further plank in their strategy of what amounts to Quantitative Easing (QE).

This took place in a speech in London yesterday. The main target of the move will be German Bunds. This is appropriate, as Germany is by far the best performer in the Eurozone, but also ironic, because that country’s central bank president, Jens Weidmann, is one of the foremost critics of anything that might tend to increase inflation, as such purchases will undoubtedly do. The ECB still has to overcome German opposition to its efforts in this regard, and that is by no means a foregone conclusion.

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