Sterling is under pressure today. We fell to the lowest level against the US Dollar in 10 months as a report showed UK inflation slowed to match the lowest level in five years. Indeed, Sterling has dropped over 3% against the US Dollar in a month. Will this drop continue? It is of course all dependent on the Scottish vote and result on Thursday evening and into Friday morning. If it is a ‘Yes’ vote then, well, who knows how far it can drop. Various analysts and economists are predicting a 5-10% drop for Sterling in the event of a ‘yes’ vote. Should it be a ‘no’ vote I think much of the inevitable move higher has been priced in so we may see a 1-2% move higher at the most. Let us come back to the Scottish referendum and its implications later.We had a poor ZEW figure released today from Germany today. It hasn’t had too much of a negative effect on the single currency as market participants are looking at the FOMC minutes tomorrow as much more pertinent for EUR/USD. Indeed, it is thought that the FOMC will be of the opinion that the asset purchase program may come to its conclusion at the end of October. Even with the progressive growth the US economy has seen (it was always going to come back) I think interest rates will only be raised, gradually, over a two year period starting from next year as there is still some give in the labour force and no real evidence of inflation. It will be interesting to hear the comments tomorrow evening (UK) time. We have been in very tight ranges this week with a very much ‘wait and see’ attitude from investors and traders. It has been lacklustre.
Tomorrow is the start of the week for currency markets. The start to a potentially quite historic week. We have the Bank of England minutes released at 09.30am tomorrow morning along with the Claimant count and ILO unemployment rate. Sterling will, I imagine, be volatile for the rest of the week. The UK data is followed by CPI data (inflation) released from the Eurozone which will move the single currency. If it is strong it could push GBP/EUR lower still. Short-term, I am not seeing too much upside for Sterling crosses. I would look, more than ever, at being risk adverse and locking in your exposure this week prior to Friday. Please contact myself or one of the trading team to discuss a strategy for the rest of this week. You may well save yourself thousands if not tens of thousands of pounds by doing this.
The vote in Scotland is taking place on Thursday. I am sure everyone is aware of this. The result is expected between 5-7am on Friday morning. Thursday and Friday will be a couple of exceptional and indeed historic days regardless of the outcome. They also have the potential to be the most volatile days for Sterling in living memory.
Our suggestion to our clients who have a transactional requirement for GBP/EUR/USD is to put a strategy in place now to protect themselves. If it is a ‘YES’ vote then Sterling may fall up to a further 10%! That will put us in the 1.40s on GBP/USD. What will that do to your profits and for pricing for the rest of the year and into Q1 2015? Regardless of your leanings and view there will be movement in currencies. If it is a ‘NO’ vote then Sterling is expected to bounce 2-4%. However, I think a lot of that move is priced in already so upside I think is limited to a 2% spike higher. I personally feel that a ‘No’ vote will just come through but as we’ve all seen in the polls, this is too close to call.
How are you going to protect yourself? How are you going to take advantage of the movement? Have you thought about placing a market order? Market orders work best when there is heightened volatility. Well, this week will certainly provide that! Please contact myself or one of the trading team to implement a strategy as this is going to truly be an exciting and historic end to the week.
Written by Liam Alexander