Article provided by Liam Alexander, Partner at Aston Currency Management, for Beacon Gainer private wealth advisory services group.

2020 is off to a wonderfully geo-political start. Whilst there has been a de-escalation of the US/Canadian Iran crisis and oil prices have retreated from recent highs, tensions in the Middle East will continue. Choosing what Quality Street to eat on the couch seems like a lifetime ago. At least Brexit and trade talks won’t be discussed too much this month. Oh wait.

Sterling has come off against the Dollar in January on the back of dovish comments from Bank of England’s Vlieghe and we also had an external MPC (Monetary Policy Committee) member saying a rate cut is needed. Inflation figures for December showed we’re under the Bank of England’s target rate of 2% with a print of 1.3%, the lowest level in three years. The door is being left open for a rate cut, perhaps as soon as the end of January. If we undershoot the inflation target and the expected ‘Boris bounce’ doesn’t materialise for the economy and generate adequate growth levels, then expect interest rates to be cut. The market is now pricing in a 60% chance of this happening end of January.

Whilst this uncertainty continues Sterling may be under pressure. Indeed, Cable (Sterling/Dollar) has tumbled below 1.30 the figure in the first few weeks of January.

What is going to move Sterling over the coming months? It won’t be UK/EU trade talks as there’ll be scraps of details in Q1. Sterling will be dictated by Monetary policy and the Governments budget in March.

Short-term I expect Sterling under pressure. However, towards the end of 2020 I expect Sterling/Dollar to climb higher and trade back around 1.35 the figure with some Dollar weakness being the main driver rather than Sterling strength. If you hold US Dollars and can convert back into Sterling around the 1.30 level I would suggest this is a good level to achieve.

You can view the movements on Sterling/Dollar in the first week back in January in the graph below –

In addition, it may be worthwhile staggering take profit orders to the downside to take advantage of any further moves lower should the Bank of England cut interest rates. I would expect a sell off in Sterling that could push us lower and through a key support level at 1.29. The team at Aston are on hand to discuss your individual requirements.

In terms of purchasing US Dollars it is always worthwhile covering off a portion of your exposure, so you have a price point to work from. Looking further out and past Q1 I do expect Sterling/Dollar higher so it may be prudent to leave a portion of your exposure to capture any upside. The trading department at Aston can work through your specific requirements and work with you to determine a strategy that best suits your needs to mitigate your currency risk.

Sterling/Euro

Sterling/Euro has retreated to the downside at the start of 2020. We have come off from highs over 1.20 on the back of the UK General Election. The Conservative majority took away some of the risk associated with all things Brexit although this move higher hasn’t been sustained.

You can view the movements on GBP/EUR in the first week back in January in the graph below –

Once the UK formally leaves the EU on 31st January the UK will enter an 11-month transition period. The UK has said in the PM’s Brexit Bill that a deal will be done this year and that the transition period will not be extended. Hmmm.

I’m sure we’ve heard of extensions not being extended then being extended before? However, we have in effect a hard deadline now to work towards. The nearer and more likely we are to doing a deal Sterling will rally. If a deal is far off then Sterling drops. Same parallels as the good old ‘Deal or No deal’ since the EU referendum in 2016.

If you need to sell Euro’s into Sterling consider taking advantage of the moves lower over the past few weeks. Please get in touch with the team at Aston to discuss exchange rates and technical levels to aim for.

In terms of purchasing Euro’s from Sterling anything around 1.17 feels like fair value at present. Might we shift higher to 1.20 this year? Yes, I believe so. However, for the short-term GBP/EUR will be under pressure.

Should you wish to discuss your specific FX requirements for 2020 with the team at Aston please feel free to get in touch.