Sterling has recently done more swings, dips, twirls and somersaults than the cast of La La Land do throughout the entire movie. Does Sterling make a sensational comeback and collect the FX equivalent of an Academy Award or is Sterling going to tap dance its way lower in the coming months? Answers direct to Ryan Gosling please.
You can see the movements on Sterling/USD from last week to 9am this morning below –
Sterling briefly went below 1.20 in the Asian session and for the first time since the October ‘flash crash’. This was on the back of a Sunday Times column reporting that Theresa May will likely say the UK will quit the Single Market and in all likelihood the Customs Union to regain control over Britain’s borders. Her speech tomorrow will give us a modicum of clarity. Once again economics has largely gone out the window and Sterling is moving on political news.
Where does Cable (GBP/USD) go before the end of March?
We said at the beginning of the year we expected 1.20 the figure to be broken by the end of January. This has duly materialised. Now we have broken this psychological level I think there is room and capacity for us to now challenge 1.15 the figure. Sterling will have moves to the upside on an intraday basis although sentiment, political and upcoming economic instability is going to weigh on Sterling short-term. If you have a requirement to purchase USD from GBP in Q1 consider covering off a large part of your exposure on a SPOT or Forward Contract basis. This will take risk off the table and you aren’t at the mercy of any large downside moves in the coming months. At the start of last week we were trading around 1.22 on Cable (GBP/USD). We’re now jumping around the 1.1950 to 1.21 range. That range will likely move lower still next week. Please contact me to discuss your upcoming requirements to mitigate your currency risk. Is Sterling undervalued? Probably. Does it count for much in the current market? Not really. If you are a seller of USD back to GBP lock in some of the recent move. It wasn’t long ago we were settled way above 1.25.
The main news story is Sterling. For now. We have Mark Carney, Governor of the Bank of England, speaking later today. Will he discuss inflation pressures and economic growth and the challenges a weaker pound is likely to place on policy makers? I think he will likely try and deflect as many of these questions as possible prior to Theresa May speaking tomorrow. The landscape may change in 24 hours once again.
Once the market digests the information we will soon leave Sterling behind (with the exception of the Supreme Court Ruling on triggering Article 50). We will switch our focus to the US and Trump from the 20th onwards, the President Elect’s inauguration date. The real game begins then. Noises of large infrastructure spending and tax cuts have given US markets a kick higher. Business confidence last week jumped to the highest level in the US since 1980. Stock markets have been to an all-time high. Can Trump keep this confidence rally going? What will he do in the key first 100 days of his Presidency? Will we get clarity that his last press conference lacked? What will this do to the US Dollar? Will we see a gradual sell off of the US Dollar against a range of currencies? Will Sterling be the exception to the rule? This week is going to give a lot of clarity on a number of key issues that have been discussed for a long time. Theory is shortly going to move to practical. This is going to drastically increase volatility. Please do contact us to implement a strategy.
Where does Sterling/Euro go before the end of March?
Will we now lose passporting rights and go for a form of ‘equivalence’? (Grants non-member countries with similar regulatory standards and frameworks access to European Financial markets). This of course is not ideal as the EU could move the goalposts at any time so we’re still largely at the whim of the EU. Are we though now nearing a sensible negotiating position where we realise the UK will need to cede some ground in certain areas to gain in others? Negotiations are going to be so complex it is almost unfathomable. I don’t expect a clean break. I expect it to be a bloody one and volatility and uncertainty is going to abound for the coming few years. Is Sterling undervalued against the Euro at present? Absolutely. Will Sterling push up again the single currency in time? Absolutely. Is Sterling going to continue to be under pressure short term? Sure you can guess the next word.
‘Brexit’ is not just a UK problem. If anything it could prove more of a headache for the EU. Would all the Banks leave the UK? I doubt it. Some parts/cost centres may move overseas whilst the dust settles on the UK/EU parting. Would the EU want the Balance Sheet of the large UK based Banks to manage? To my knowledge, the EU are having enough issues managing the current Banks. Think MPS (Monte dei Paschi). Would they want more headaches to manage and in the event of another crisis be happy to take on the burden of bailing out some of these colossal institutions. I don’t think there is stomach for that particular fight.
In recent trade we have had Sterling/Euro testing new lows. We have moved from the relative comfort of levels above 1.15 to a move south of this figure. You can see the movements of Sterling/Euro last week to this morning on the graph below –
We have a full data calendar this week and in the normal scheme of things the ECB would be an important event. I think it is likely to take a backseat this week and I don’t expect any change to its stimulus before September. The EUR is very much a bystander at present and is largely dictated by what happens to Sterling and also the US Dollar. However, we did have good figures out of Germany last week showing the economy grew by 1.9% in 2016. Is the EUR due a move higher? There may be a small move to the upside although I don’t see it driving markets short-term.
Other data that is important to note this week is
- Tuesday – Inflation data out of the UK, ZEW survey (sentiment) out of Germany
- Wednesday – Employment data out of the UK and inflation data out of the EU and also the US. Janet Yellen, Chairperson of Federal Reserve speaks
- Thursday – Aussie Employment change and unemployment rate/ECB interest rate and deposit rate decision and monetary policy statement and press conference
- Friday – Federal Reserve Chairperson Janet Yellen speaks and Chinese Q4 YoY GDP released.
As you can see from the above it is an extremely busy week in the FX markets. We’re fully back in the swing of things post Festive break. Feel free to contact me to discuss your upcoming requirements as we’re in for an interesting 2017!
Have a fantastic week.
Written by Liam Alexander