Article and analysis provided by Liam Alexander, Director, Aston Currency Management, based in London.
It is a bleak grey Friday morning in London. The one ray of light is that Sterling is having a spell in the sun. Finally! Will this last to the end of October or indeed even next week? Hmmm.
Sterling is riding a wave of Brexit optimism. At the beginning of the week talks looked doomed to failure and Sterling dropped off against a basket of currencies. Following a meeting between the EU’s Chief Negotiator Michel Barnier and the UK’s Brexit secretary Steve Barclay talks are looking ‘promising’. Indeed, the British Prime Minister Boris Johnson and the Irish PM Leo Varadkar said they could “see a pathway to a possible deal”.
On the back of this news flow a 250-pip rally commenced on Cable (Sterling/Dollar). You can view the movements on the graph below –
Volatility will continue over the coming weeks and whilst Sterling is in the ascendency at the moment it may prove short lived. Any movements in Sterling will be dictated purely on Brexit news flow over the coming weeks. If you hold Sterling and are considering moving into US Dollars, it may prove prudent to look at taking advantage of this recent move. Might we climb higher still and target 1.30 the figure? Potentially. This will of course be largely dictated by getting a deal done and over the line. By executing a percentage of your exposure at current levels on a SPOT basis it takes some risk off the table. If you are of the opinion that Cable will rally higher consider implementing some take profit orders to take advantage of any further upside moves.
If you are holding US Dollars, then there has been a 3% move against you in the space of two days. Looking at this you may consider ‘sitting tight’. However, if we look at where rates are on a historical basis, they are still at very competitive levels to move back into Sterling. The old phrase of ‘doing nothing is speculating’ still holds true. Cover a portion of your exposure off at current levels and then you can take a view on where Sterling is going to trade. This rally may prove short-lived.
On the Sterling/Euro front we have broken out of recent ranges and traded through 1.14 the figure on Friday 11th October.You can view the movements overnight on Sterling/Euro on the graph below –
By the time I’ve finished writing this sentence the whole landscape could well of course have changed. Both the political and FX landscape. These times are truly historic and unprecedented. That creates uncertainty and scope for quite dramatic moves in FX rates. I would say in times of heightened volatility that being as risk averse as possible is the sensible solution. Have a plan in place to mitigate your downside risk whilst allowing for some upside potential. All focus, quite rightly, is on Brexit as we get onto the home straight. However, there is still numerous other things to consider for UK PLC around interest rates for example. If we look at UK performance, I’d expect annual growth of around 1% this year. Inflation is printing 1.7% so that’s below the Bank of England’s target rate of 2%. Guess what? The monetary policy response is to normally cut rates. The only reasons not to cut rates? Wage growth of circa 4% and then of course Brexit – no-one still has any idea on how things are going to play out so the Bank of England may go into ‘wait and see’ mode. I think we’ll have a rate cut from 0.75% although we’ll see if that plays out.
The House of Commons sits again on Monday 14th October. The key dates that could well steer the direction of our whole economy and future is the two-day EU summit in Brussels. This is the last meeting scheduled before the Brexit deadline. On Saturday 19th October there is a special sitting of Parliament. Will this be the day that we get a deal approved by Parliament? Potentially.
I expect the next few weeks to be both volatile and historic. Make sure you have a plan in place around your FX exposure as there will be many twists and turns still to come!