Since last week’s flash crash below $1.20, and subsequent rebound the pound has looked ill at ease and been unable to catch a break, as policymakers and politicians line up to predict disaster in the event of a hard Brexit.
The day didn’t start well with the publication of leaked Treasury documents which predicted a £66bn hit to the UK economy in the event of a reversion to WTO rules. It was then followed by new MPC policymaker Michael Saunders suggesting that the pound could well fall further, given the new equilibrium, but that for now he wasn’t concerned about the pace of the decline at this point.
On the upside the weakness in the pound did briefly see the FTSE100 make a new all-time high at 7,130 yesterday, however there does seem to be some evidence that stock markets globally are starting to find the air a little bit thin at current levels, if last night’s declines in the US and the weakness in Asia markets is any guide.
The pound hit new 30 year lows yesterday after comments from London Mayor Sadiq Khan to the CBI that leaving the single market would be “disastrous”, no shortage of hyperbole there then, while reports out of Germany appeared to suggest that Angela Merkel had warned German business not to oppose the EU’s Brexit tough line.
We’ve since rebounded sharply after UK Prime Minister Theresa May accepted that MP’s would be allowed to vote on any measures that would take Britain out of the EU. Given that the UK parliament is considered largely pro-Remain the change of position appears to have prompted some short covering on the basis that some MP’s will seek to significantly water down any exit terms.
Following on from last week’s politics inspired volatility it would appear that trying to find a floor for the pound is going to be difficult in the short term, simply due to the amount of political uncertainty being generated on both sides of the Channel, as both sides dance on the edge of the volcano, in laying out their negotiating positions, which for now appear a long way apart.
This is what is currently spooking investors given that a lot of these statements are designed for domestic consumption, particularly since next year we have French and German elections.
While it is in neither side’s interests to have a messy outcome, we are a long way from any sort of conclusion, given that Article 50 hasn’t even been triggered yet, which means that further volatility in currency markets is more or less inevitable, which in turn could mean further declines in sterling.
The US dollar has continued to be the primary beneficiary of this uncertainty hitting its highest levels since March, as markets look to the potential for a rate rise in December ahead of the publication later today of the latest FOMC minutes, where we will get further insight into the level of the dissent about last month’s decision to hold rates steady.
We know the doves were able to win the argument this time, however we don’t know how wide the divisions were and whether any other members felt compelled to go with the dissenters, but harboured enough doubts to hold back and wait a little bit longer. If the minutes point to any waverers on the dove front then the US dollar could well take another leg higher.
Stock markets now appear to be starting to feel the strain after Alcoa’s earnings missed expectations yesterday and oil prices started to slide back, with US markets closing sharply lower.
For the last few quarters the earnings of S&P500 companies have been on the slide and if this latest earnings season continues that pattern of decline then this renewed bout of US dollar strength could well start to see US markets topple over, if last night’s sell-off is any guide.
Fed fund futures currently suggest a 67% probability of a move on rates in December; however that calculus could well shift sharply if the current uncertainty in Europe spills over into a wider stock market sell-off.
It would be much more difficult for the Fed to move on rates in December if the US dollar continues its current trajectory higher.
EURUSD – has continued to fall towards the August lows at 1.1040, with a break lower potentially arguing for a move towards the 1.0950 area. Upside resistance remains at the 1.1300 level.
GBPUSD – continues to look weak with the inability to recover back through 1.2500 keeping the pressure on for a move towards the 1.2000 area. A break below the 1.2000 area has the potential t open up the previous flash crash lows at 1.1950, and possibly lower.
EURGBP – flashed up towards 0.9300 last week before snapping back and trading either side of the 0.9000 level. While above the 0.9000 level the risk is for a move back to last week’s high. Support sits all the way back down at the 0.8780 level with a break arguing for a move back towards the 0.8720 level.
USDJPY – the US dollar has remained fairly resilient but has thus far failed to push through the September highs at 104.30. If it falls back below support in the 102.20 area we could well slip back further towards 100.00. For the up trend to continue we need to push back above 104.30.
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