‘Brexit’ negotiations finally get underway today in Brussels. Does the UK now want a ‘Soft Brexit’? Does Theresa May have the political clout to change tact? Has the chances of ‘No deal’ gone up in the past few weeks? Almost 12 months on from the referendum result we have about as much clarity of thought as a sleep deprived Eskimo in the desert.
This week is relatively quiet on the data front. Last week we had a hawkish Bank of England meeting that suggests we may tentatively in the near future be moving out of a low rate environment. The UK is still battling with inflation that is set to top 3% this year. Sterling has taken a massive hit post ‘Brexit’ with wage growth hurtling lower and faster than confidence in Theresa May. This has squeezed living standards. Data from the UK over the coming months is going to be a mixed bag. What is going to drive Sterling over the summer months? It is likely going to be headlines from negotiations with Michel Barnier and the EU. I’m not expecting Barnier and David Davis to be taking a gentle stroll through Brussels eating ice cream and coming to a quick and beneficial agreement for the UK. Are we going to have to pay a divorce bill of 100 Billion Euro’s to get negotiations going to a meaningful start? We will slowly over the coming weeks start to get some idea of how negotiations are going to play out.
Sterling is going to have dips and spikes over the coming months against the Euro and the US Dollar. These moves may be severe. We had the surprising split in the MPC (Monetary Policy Committee) last week that gave a significant shove higher for Sterling. Will this shift to the upside last? I have been Sterling negative for a long time and whilst I don’t see the economic fundamentals changing for the UK anytime soon, and I still see risks to the downside for GBP, there may be a sliver of light at the end of a very dark tunnel. Do I think the steam train we are currently sitting in is going to suddenly morph into a Japanese Bullet train and come out the tunnel 10% better off? Nope. We’re going to trundle along the train tracks, stop for coal now and then and hopefully come out the other side in a better position than when we entered. The environment on exit isn’t unfortunately only shaped by us.
With the increasing uncertainty around Sterling consider covering off some of your exposure if you are a EUR buyer from GBP. You can look to take advantage of the bounce in Sterling from last week shown on the graph below –
Will we go back through 1.15 the figure? Potentially. Although having been trading in the 1.12’s only a week or so ago it may be prudent to lock in some of the move now. Please contact the trading department for a rate of exchange.
Selling Euro’s back to Sterling? Consider structuring market orders to take advantage of any downside moves for Sterling on the back of opening Brexit negotiations. With Emmanuel Macron completing a parliamentary majority in France the Europeans look to be pulling together with political uncertainty subsiding. This may translate into further Euro strength. If you can achieve 1.14 the figure on a market order initially then stagger orders at 100 pip intervals at 1.13 and 1.12 then these may be realistic levels to aim for in the coming months. Please get in touch with the trading department or you can contact me directly.
Are we heading back to 1.25 or is a move back to 1.30 on the cards? It’s going to be very much like Stoke City in the Premiership short-term. Not going to move up or down too much from their current mid-range position. EUR/USD has been hovering around 1.12 the figure for quite a while with no clear break in either direction. If we see a sustained move above 1.12 then this will drag Sterling/Dollar higher. Last week we did of course have the Federal Reserve meeting where they duly delivered on a rate rise that was as obvious as Lord Lucan is still missing. The Dollar strengthened against the single currency although it has since reversed most of the gains. Will the Fed get in hawkish mood for future rate increases and will we see a strengthening US Dollar? Potentially although there is going to be movements in either direction largely on risk events.
You can view the movements last week on Sterling/Dollar below -
If you hold Sterling I would cover off a small portion of your exposure into USD at current levels. Please contact the trading department for a SPOT rate. This removes a portion of your risk off the table short-term. I would then consider placing market orders on a GTC (Good till cancelled) basis. Please contact the trading department to discuss appropriate levels to target. We may have overnight movements that you can take advantage of that you wouldn’t ordinarly execute at during UK working hours.
If you are selling USD rates are looking competitive. Think back 12 months and where we were trading. Could we see 1.25 on USD/GBP again. Absolutely. Look to lock in a portion of your annual exposure on a SPOT basis then consider placing orders to the downside. You’ll be bored of hearing this by now although please contact the trading department or me directly to structure these.
If you’re in London this week, remember the sun cream and have a fantastic week.
Any questions please do let me know.
Written by Liam Alexander