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The British Pound could be set to soar like a plane as Sgt Pepper’s Lonely Hearts Club Band pervades the airwaves once again, while the market sings Bye, Bye Miss American Pie, as it looks like that time for it to rise on up high, for if there ever was such a thing as Glossolalia, then it wouldn’t call for another Black Dahlia.
GBP/USD remained buoyant around seven-month highs in European and North American trade on Tuesday as it continued to erode a major long-term resistance level near 1.3427 on the charts, which coincides with the 78.6% Fibonacci retracement of the June 2021 to September 2022 downtrend from 1.4264 to 1.0355.
This was as the Dollar remained soft near landmark lows against most of its major counterparts, despite a stabilisation of the Treasury market following the weakness seen in illiquid Easter Monday trade, suggesting that upside pressure for a possibly explosive breakout to the topside continues to build.
“Trump is saying many of the same things that many of those covering the Fed in markets are too - just far less politely; and very inappropriately in the eyes of those same commentators,’” says Michael Every, a strategist at Rabobank. “They are allowed to criticize an independent central bank and take market positions to bend it to their will, but politicians are obviously not. That’s part of the Liberal World Order."
Above: GBP/USD shown at weekly intervals with Fibonacci retracements indicating possible areas of technical resistance. Click for closer inspection.
Tuesday’s soggy show from the Dollar followed hard on the heels of broad Monday losses that came in the wake of US President Donald Trump’s heavy criticism of Federal Reserve Chairman Jerome Powell that afternoon, which was just the latest installment in a barrage that began last week.
“Whatever other assumptions we make, it’s hard to avoid the conclusion that imposing draconian import tariffs on goods which have no easy domestic substitutes in the US, a country with little spare capacity anyway, will be inflationary (and ultimately, bad for growth),” says Kit Juckes, chief FX strategist, at Societe Generale.
“Add that into a mix that includes political influence over the Fed and unsustainably vast international investment imbalances (a structural failing of the post-Bretton Woods FX system but that’s a different story), and we have a recipe for a significant dollar fall,” he adds, in a Tuesday market commentary.
The White House gripes over the Fed Chair and level of interest rates have reportedly gotten investors, traders and market mythologists worried about a return of inflation, and further losses for American markets, which come at a time when US assets are not without sufficient headwinds already.
Above: Britain’s Lucy Thomas does You Are the Reason. Source: Youtube.
“Concerns over the Fed’s independence, Trump tariffs, and heightened uncertainty into earnings season has the market withdrawing capital from the US,” says Sarah Ying, head of FX strategy at CIBC Capital Markets.
“[This is] made worse by speculation that larger foreign accounts could be selling Treasuries (the speculation is more important than whether or not it is actually happening),” she adds, in Tuesday market commentary.
This is because the concerns about the Fed’s independence themselves came in the wake of earlier large losses that were seen in the wake of Trump’s “Liberation Day” tariff announcement, which was followed by large and sometimes-simultaneous declines in most US equity, bond and currency markets.
The tariff announcement led American stock markets to fall heavily, perhaps due to its negative implications for near-to-medium term corporate profits, as this makes valuations appear obscene and there isn’t a corporate finance textbook in the world that could justify anything except falling prices in those circumstances.
Above: America's Don McLean does A Horse With No Name. Source: Youtube.
The worst of the Dollar decline came through Holy Week and has evoked use of Exodus as a metaphor for what may be happening with the currency. This describes the escape of some early Israelites from Egypt, in the Old Testament book of the same name, a story in which Moses receives commandments and a covenant while sojourning on a mountain, only for the latter to later be broken, leading to the events described in the Book of Jeremiah where it says "the people of both Israel and Judah have done evil and aroused my anger by burning incense to Baal," among other things. The story can be found in Chapters 12:20, and the covenant in 20:23.
“John Authers at Bloomberg just ran a piece titled ‘This Passover, Everyone Has Questions’. His annual tradition of asking four questions, as in that ancient ceremony, didn’t start with the obvious one: “Why is this market different from all other markets?” But when the 30-year Japanese bond can fall 11bps on the day, most traditional takes on what is going on look, well, ‘unleavened,’” Rabobank’s Every says, in a market commentary last Wednesday.
“To the answer: this market is different from all other markets because in all other markets we assume there is one global economy within which all goods, services, and capital flow, with one single global reserve currency, the US dollar. Now, we might be witnessing an Exodus from it,” he adds.
However, the Dollar’s losses and the periods of weakness in the Treasury market have been exacerbated by the pressure that Trump’s “Liberation Day” tariff announcements have placed on the trade-weighted Chinese Renminbi, which has appeared to prompt repeated bouts of official intervention in recent weeks, and partly because there is a positive correlation and a quasi peg linking the managed-floating and trade-weighted Renminbi with the Fed’s Broad Dollar Index.
Above: Wales’ Bonnie Tyler and Hero. Source: Youtube.
The tariff-related pressure on the Chinese currency would almost certainly have been part of why the People’s Bank of China’s central parity fixings for the Renminbi and the counterparts in the China Foreign Exchange Trade System Index basket signaled on Tuesday an appetite for a broad depreciation of the currency.
“A slightly higher USD/CNY fix (weaker yuan by 19 pips, to 7.2074) triggered upward momentum in USD/CNH, and the pair jumped by 0.15% to 7.3070 post-fix, given the market was expecting a slightly stronger yuan fix after the USD declines on Monday,” Ying says, in CIBC’s Tuesday market commentary.
Some 20 of the 25 currencies in the index saw their central parity fixings raised on Tuesday, with these accounting for 82.94% of the index, seemingly reflecting a preference for a continued depreciation of the trade-weighted exchange rate, which matters for other currencies due to the quasi peg with the Dollar.
The fixes matter for the US dollar because the PBoC's basket-based currency management creates a positive correlation with the trade-weighted renminbi, and because the dollar's intermediary role in the market makes it impossible for Beijing to manage the G20/CNY pairs without also directly affecting the G20/USD pairs.
Above: Sweden’s Roxette does “Listen to Your Heart.”
Coinciding with all of this, and coming amid much speculation about the US Dollar’s position as the dominant global reserve currency, the sometimes-simultaneous declines in US equity, bond and currency markets even appeared to play a role in prompting Christine Lagarde to indirectly echo the words of a Greek philosopher and so-called “sage of Ephesus,” otherwise known as Hericlitus, last week.
“There is a nice African saying which goes “you never swim twice in the same water”. I think for economic players, investors, consumers, employers, employees and all categories, confidence, predictability and a reasonable level of certainty are important factors for them to make decisions,” she says.
Hericlitus reportedly coined the term “Logos” and is recorded as one of the earliest thinkers to have explored the notion of a first primordial, and the primordial layering of all things. However, the above recital may or may not have been contextually flawed due to its original presentation in support of “Flux Theory,” which posits that no one thing can ever be the same thing from one moment to the next.”
“Ultimately, Heraclitus loads his words with layers of meaning and complexities that are to be discovered in insights and solved like riddles. As he implies in the second sentence of his introduction, B1, his logoi are designed to be experienced, not just understood, and only those who experience them in their richness will grasp his message,” researchers at Stanford University say, in a summary of his works.
Above: New Zealand’s Hayley Westenra, and Ireland’s Celtic Woman, do Simon & Garfunkel’s Scarborough Fair. Source: Youtube.
The questions about the US Dollar’s position as the dominant global reserve currency, and the concurrent rally in EUR/USD, have prompted much speculation about whether the Euro could now be wearing the crown of the currency market, however, one wise person says that this would be unwise.
“I continue to argue Europe is in NO way ready, or willing, to take on that burden, and any market ‘favouritism’ towards the Euro is a gift it won’t want to accept once it sees the euro pro quo,” says Every, writing in Rabobank’s Tuesday market commentary.
“Conversely, French President Macron reportedly claims Europe is ready for the burden of the global reserve currency…. which in the current broken system means a much higher euro, a much larger trade deficit, much less industry and rearmament, and much more inequality. Unless Europe thinks it can have a global reserve currency while running balanced trade or trade surpluses… which sounds like the US plan everyone is now decrying,” he adds.
These dour Dollar influences are not the only reasons why Sterling might ultimately be only a moment away from turning Turbo Bid With No Lid, however, as there is also support for this coming from the so-called International Monetary Fund, and the Bank of England.
Above: Britain’s Lucy Thomas does Canada’s Leonard Coehn and Hallelujah. Source: Youtube.
The IMF raised its forecast for inflation in Britain on Tuesday and claimed it would rise this year because of domestic influences, and because the BoE still peddles dubious claims and perhaps-exploitative-mythologies purporting that it’s able to control inflation simply by waving an interest rate around in the air, which is part of why Sterling bond yields are now the highest in the G10 group.
“The gilt market continues to function well, but yields have been volatile. The gilt curve has steepened as markets reprice for more interest rate cuts from the MPC. Longer-dated gilts have sold off and remain vulnerable to policy developments,” says Robert Wood, chief UK economist at Pantheon Macroeconomics.
“President Trump’s “Liberation Day’ tariff salvo has upended the global trading environment, leading forecasters to slash their projections for global economic growth and sending ruptures through financial markets. But the UK has so far been spared the worst of the US- led financial-market convulsions,” he adds.
Hence why GBP/USD could be set to soar, singing There You’ll Be at your door, after rising to 1.44, and We Thank You Lord for those summer rains across the board, as Sgt Pepper’s Lonely Hearts Club Band hears that song Bye, Bye Miss American Pie, leading it to rise up high, before a thirsty throng, for if there had been such a thing as Glossolalia, it would never have called for a Black Dahlia.
Readers should probably note, however, that this would likely become a very bad forecast if there is any resumption of the simultaneous declines in the US stock, bond and currency markets seen earlier in April, as those led Sterling underperform alongside the US Dollar and Norwegian Krone, while currencies of current account surplus jurisdictions outperformed.
Above: America's Don McLean does Bye, Bye Miss American Pie. Source: Youtube.