January 15th. The next big date in the diary. Nope, not when the New Year Avocado and Kale salad with a sprinkling of pine nuts, washed down with Kombucha tea comes crashing down to the inevitable conclusion. It’s a Parliamentary vote on Theresa May’s Brexit deal.
Like a wheezing middle aged gym goer pounding the treadmill in January, the UK is coughing and spluttering towards the end goal of Brexit. We can make as many predictions around what will happen end of March as we like, although frankly, no-one has an answer.
What we can look at is the direction of Sterling in the run up to March.
If you look at the graphs below you can view the movements in Cable (Sterling/Dollar) and Sterling/Euro in the first week of 2019 -
As you can see Sterling has suffered a few sharp downside moves although has recovered in recent trade against both USD and EUR. Expect ebbs and flows to continue through Sterling in Q1’19. After the end of March? All scenarios are on the table. If there is a ‘Hard Brexit?’ Sterling could potentially fall to and through the 1985 low of 1.07 against the Dollar. Do I expect this to happen? No. However, if you are a USD buyer from GBP I would consider locking in some of your Q1 and Q2 exposure at current levels to protect yourself. Consider implementing either a SPOT transaction or discuss Forward Contracts and margin considerations with our trading department.
As above, if you need to hedge downside moves in GBP against EUR do consider implementing a Forward Contract. This provides you protection should the end of days as some sensationalist headlines suggest occur. Might rates move in your favour over the coming weeks/months if the risk of a ‘No deal’ Brexit becomes less likely? Absolutely. Therefore, in addition to Forward Contracts consider the other side of the trade and implement take profit orders to the upside to take advantage should we see a change in sentiment. Please contact the trading department to discuss technical levels.
If you are a seller of USD and EUR against Sterling then fill your boots at current levels. Historically, we’re at attractive levels. If you would like a SPOT price please let myself or the trading team know. If you think there is further to run to the downside then look at staggering take profit orders. Again, please contact my trading department directly to discuss your own specific requirements.
We had a strong NFP (Non-Farm Payroll) figure out of the US on Friday with a print of +312K for December. This shows the US economy is in a strong position although of course trade tensions with China remain as well as concerns around global growth. The key question for the Federal Reserve and Mr Powell (Fed Chairman) this year will centre around interest rate rises. Will there be two or three rate rises and can the US economy handle this? The Fed Chairman believes the data and thinks so. The man with the yellow hair in the White House not so much. Expect more news coverage around this and no doubt a media fallout.
Should we see a combination of a stronger Dollar coupled with an under pressure UK pound in Q1’19 then we could potentially test a strong support level of 1.20 on GBP/USD. Please make sure you have discussed a strategy with our team to make sure you’re protected whilst allowing yourself upside potential.
What do we have out this week? It’s a relatively light week on the data front although we have the Bank of England Governor, Mark Carney, speaking on Wednesday. We also have the FOMC (Federal Open Market Committee) minutes out that day from the US too. On Thursday we have the ECB (European Central Bank) monetary policy meeting accounts and then the Fed Chairman, Jerome Powell, will speak in the evening (UK time). Rounding off the week on Friday we have GDP (MoM) (Nov) out of the UK. A print of 0.1% is expected.
Whilst there is always movements in currency markets the run up to the end of March and ‘Brexit day’ could prove extremely volatile. Levels we haven’t seen for a long time, if ever, may materialise. Please make sure you have a conversation with us to discuss your requirements for Q1 and Q2 ’19 and put a plan in place to mitigate your currency risk.
If you have any questions please do let me know.
Have a fantastic week and enjoy the gym!
Written by Liam Alexander