ACM Update Monday 8th June 2020

Sterling has started the summer months with a move higher against both the Dollar and the Euro. Will improving global market sentiment and Brexit talks push Sterling further or will we have a retracement lower?

Sterling has been running faster than Usain Bolt in recent trade. Cable (GBP/USD) has opened at the highest level since March 12. The last day of any real normality. We have always thought Sterling was undervalued although market forces dictated that it traded lower. Sterling/Euro has also opened at the highest level in 3 weeks. Has the tide turned? In a way, yes. Although, it can come back in pretty damn quickly. Brexit talks look to have taken a sensible turn. Whilst a post Brexit trade deal is still miles off and both sides still far apart there is an acknowledgement that face to face negotiations are likely in July although the real months of talks will be September and October where hopefully a deal can be struck. Sterling has rallied with the negative sentiment around GBP perhaps overdone. Whilst I think there may be some further room in the move higher I still don’t see Sterling shifting materially higher. There are still enormous risks to the downside on a no deal scenario. These worries, whilst perhaps off the table for now, will come back in September.

Look to take advantage of these moves. If you have a requirement to purchase USD from GBP look at covering off some on a SPOT basis. We’re around 2% higher than last week’s opening.

You can view the movements in the graph below –

If you think there is further to run in this move consider implementing take profit orders to the upside. Whilst I think 1.30 is going to be a push 1.28 is a possibility short-term. Whilst the Dollar has been given a bit of a kicking from GBP and the EUR recently the numbers out of the US on Friday were far better than market expectations. Indeed, 2.5M jobs were added in the US against expectations of a 7.5M decrease. Expectations of the unemployment rate were for a print of -20%. The print came in at -13.3%. Whilst obviously exceptionally high compared to a few months ago it was better than expectations. We have the Federal Reserve meeting this week although no change to policy is expected. We will though have an update on interest rate projections. Coronavirus is still the biggest risk to the US economy and the Dollar may come under some further pressure this week.

The Euro has gained some strength after the ECB (European Central Bank) increased its monetary stimulus beyond market expectations to fight the economic fallout from the coronavirus pandemic. It now stands at €1.35 trillion. It is very much in the Draghi mould of “we’ll do whatever it takes” to reassure markets. We have the ECB President, Christine Lagarde, giving a speech this afternoon that will give us further direction on the Eurozone economy. With the Europeans coming out of lockdown and their economies reopening first there may be a further shift higher for the Euro. This will likely limit any significant upside on GBP/EUR. If you have requirements to purchase EUR it may be prudent to consider locking in some of the recent gains. Please get in touch with a member of the trading department and they will be able to run through your individual requirements in detail.

You can view the recent movements in GBP/EUR in the graph below –

In terms of data out this week the main release from the UK is GDP (MoM) (Apr). This is going to be hide behind the couch kind of viewing. Expectations are for a print of -18.7% against a previous print of -5.8%. If we see any number come in slightly higher than -18.7% this may act as a positive for GBP. If we come in at something like -20% expect Sterling to get sold off.

The world is preparing to get economies going again. Whether it is a V shaped recovery or a W shaped recovery the world and economies will recover. If you have any questions around your FX requirements please get in touch with a member of the Aston team.

Have a great week.

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.