Has the triggering of Article 50 been fully priced into Sterling yet? Will there be a sharp drop in the value of Sterling when negotiations start in earnest? Will Scotland prove a thorn in the side for Theresa May? They certainly weren’t at Twickenham on Saturday that’s for sure.
It was confirmed today that Scotland will seek permission to hold a second referendum on Scottish independence. Add this to the expected fractious nature of negotiations with the EU and Sterling may be in for continued downside pressure. I expect investor confidence in Sterling to suffer. If you have a requirement to convert Sterling into US Dollars levels above 1.20 may be viewed as good value over the coming months. I expect us to be trading under 1.20 on Cable (GBP/USD) by the end of March. If negotiations take a pragmatic approach from all sides then there is the argument that Sterling may rally. At present, I think that is a huge if. Negotiations will be as frustrating as continually being asked at the supermarket if you would like a bag. No, I’m going to carry the 37 items home on my head thanks very much.
Sterling has settled slightly higher against the USD and EUR after some initial volatility on the release. This is largely down to the fact the news was ultimately expected and now it’s out the way. If you have a USD SPOT requirement it may be prudent to lock in some of the gains today. Please contact the trading department for a rate of exchange.
Sterling has largely been on a downward trend despite some intraday spikes. I expect this pattern to continue for the foreseeable future. You can view GBP/USD movements on the graph below last week -
What do we have out this week? We have the small matter of the Federal Reserve meeting on Wednesday. We had the NFP (Non-Farm payroll) figure out on Friday and that printed 235K. The rhetoric of Fed officials on the subject of a rate rise has grown more hawkish. Will we definitely have a rate rise this week? There are no definite’ s although I would be extremely surprised if we didn’t see a hike as indicators are proving strong. The news conference will be the main focus for traders and investors rather than the rate decision. What is their few further ahead? How many future rate rises do they expect this year and into 2018? Should we have the expected results then I would expect the US Dollar to strengthen. Add the strong dollar against the downbeat Pound and that’s the reason why I see us under 1.20 the figure on Sterling/Dollar.
If you have a requirement to purchase USD from GBP please do consider executing a trade prior to Wednesday evening. This will help protect you against likely falls on GBP/USD. If you have a requirement to convert USD into GBP my suggestion would be to implement market orders at 1.2150/1.21 and then out for two weeks consider an order at the psychological level of 1.20.
Is the Euro on the comeback trail akin to Barcelona against PSG? Perhaps not quite although there does seem to be more behind the single currency at present. We had the ECB policy review on Thursday and Mario Draghi, the ECB president, indicated that risks to growth has improved. There has been an improvement in Euro area economic data and indicators recently with PMI (Purchasing Managers Index) approaching six year highs. Will the good news continue to flow out of the Eurozone? Potentially. The main risk events are still political. We have the Netherlands elections on Wednesday and whilst the ‘populist movements’ have lost ground against the main parties there is still a risk. Markets will pay attention to the Dutch elections although the French elections are going to prove to be the main political risk event for the Eurozone this year. EUR/USD has rallied and printed above the 1.07 level in recent trade and although we have had a slight rebound on Sterling/Euro today the risks are still weighed to the downside on GBP/EUR.
Do you have a requirement to convert Euro’s into Sterling? It may be prudent to take advantage of some of the gains and cover off a significant amount on a SPOT basis and then implement and stagger market orders around 1.14 then 1.1350. Please contact the trading team to discuss rates of exchange.
Where is GBP/EUR likely to go? Whilst we are trading under the 1.15 level downside risks remain. I would expect us to trade in a range of 1.12-1.17 over the next few weeks with my view being we are likely to see further moves lower.
As always, please contact us to discuss implementing a plan to make sure you mitigate your currency risk. The next few weeks are likely to throw up increased volatility with the leap into the unknown of triggering Article 50 the main catalyst.
If you have any questions please do let me know.
Have a fantastic week.
Written by Liam Alexander