Housing Hurting, GBP above 1.33

The British pound rally goes from strength to strength as the choice appears to be increasingly between a delaying Brexit and a 2nd referendum. Another round of soft US housing data raises short-term questions about the health of consumers and long-term questions about the ceiling for interest rates. GBP is the strongest of the day, followed closely by CHF, which is flexing its safe haven muscle on the India-Pakistan tensions. The Dax30 Premium trade hit the 11550 stop, posting a high of 11560 before dropping off 100 points. The GBP trade is +250 pips in the  green and remains open. The detailed Premium video on existing trades is found below.

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US housing starts fell more than 11% in December to an annual pace of 1078K, far short of 1256K expected. It was the worst month since 2016 and it was accompanied with two other soft housing numbers on Tuesday. The Q4 FHFA house price index was up 0.3% compared to +1.3% expected and the December Case-Shiller 20-city index was up 0.19% compared to 0.30% expected. Shares of Home Depot also fell after disappointing results and poor guidance related to slowing demand for renovations.

The theme on housing crept up throughout 2018. It had been expected to be another strong year for housing due to low unemployment and rising wages. Instead, housing stumbled. Part of the story is undoubtedly supply. It's difficult to build homes and tariffs on lumber pushed up new home costs. Yet, during the past 12 months, existing home sales are also down 8.5%.

A long-term worry would be that US consumers are overburdened with debt and can't afford mortgages. In Q4, the cost of a 30-year fixed mortgage rose to 4.9% in the US and that coincided with a sharp drop in activity. It's since fallen back to 4.3% on the Fed U-turn.

If rates above 4.5% (or even 4%) sparked a buyers strike that could have vast long-term implications for the Fed and US dollar. It would essentially cap the Fed funds rate at these levels. On Tuesday the dollar sold off on the housing data despite strong consumer confidence numbers. That helped to boost EUR/USD above the 55 and 100-dma and added a few more pips in a runaway day for cable.