Pound rally continues

The Pound has continued its rise today, continuing its staggering rally from the start of this year.

Today’s move is not down to any specific data and is just a continuation of its recent trend higher following increased optimism that the UK can achieve better terms for departing the EU. A so-called ’softer’ Brexit is likely to support UK growth and lead to quicker rates hikes from the Bank of England.

The UK economy has continued to perform fairly robustly since voting to leave the EU, which has surprised many investors who forecast a more significant downturn. Granted… we haven’t actually left the EU yet, so the full ramifications are still unknown, but with hopes of a transition deal and a seemingly more conciliatory EU, traders are feeling more upbeat about the UK’s outlook. Markets can be notoriously fickle though, and full trade negotiations are yet to properly kick off, so there could be a reality-check at some point for Pound bulls… tread carefully.

In other news, the USD continues to be up against the ropes as concerns have increased that Trump’s protectionist agenda will likely lead to further USD devaluation. The USD has already been heavily under fire over the past 12-mths, as other World economies have started to perform much better and look to start their own monetary policy tightening campaigns. This has increased risk appetite and caused a shift in flows out of the Dollar/US and into other major regions, with traders seeking higher yields and more balanced portfolios.

As a result, the GBP/USD has up nearly 1.8% this week and now trades at fresh highs since the Brexit referendum result (June 2016). The GBP/EUR has whipped about 1-cent higher since yesterday’s low and now trades around a 6-week high and not far off a 7-mth high.

Next up we have a key ECB interest rate meeting tomorrow afternoon. They’re not expected to change anything but the market will closely scrutinise their comments for better clues for future policy action.

Pound bounces on report that Dutch and Spanish Finance chiefs seek softer Brexit

Sterling has just spiked higher following a Bloomberg report that Dutch and Spanish finance ministers have agreed to join forces and push for a Brexit deal that keeps Britain as close to the EU as possible (a ‘softer’ Brexit).

The remaining 27 countries in the EU had so far maintained a fairly united front against Britain, particularly in the first stage of the negotiations, and these are the first real signs of some potential cracks appearing in their stance. Obviously each of the countries have different objectives and different levels of reliance on trade with the UK. For example, Spain will be trying to protect their tourism industry and they aren’t a major competitor with the UK in financial services, so would be more keen to allow a softer Brexit to reduce the impact.

Either way, this could become very important if more stories like this develop. Watch this space.

As a result, the Pound was already trading high against a weak USD, but following this report it spiked to a 1.5 year high and above a major resistance level. It will be important, from a technical perspective, to see where the GBP/USD closes the week. The GBP/EUR has been subdued this week, as traders sell the USD in favour of the Euro, following the report it bounced up over half a cent but only trades at a 24hr high.

Happy New Year!

Happy New Year!

We hope you had a great break and wish you a very prosperous 2018.

The currency markets finished the year off in the same fashion as the dominant story of 2017 – that of US Dollar weakness.

The USD had its worst overall annual performance since 2003, with the US dollar Index (a weighted measure of the USD against a basket of major currencies) falling nearly 10%. The GBP/USD started 2017 around 1.22 but finished around 1.35, and not far from the best levels we’ve seen since the June 2016 Brexit referendum result. The Euro fared even better against the USD, starting 2017 around 1.05 and pushing through the 1.20 mark on New Years Eve. It now looks like the EUR/USD could test its 4-mth high which would push it to a 2.5-year high.

This heavy movement out of the USD isn’t because the US economy has fallen flat but it is more related to how economic growth has picked up around the World and the monetary policy divergence between the US and elsewhere has started to reduce. The USD had previously gained a lot, as their economy started to leap ahead of others after the financial crisis and on expectations of a series of Fed interest rate hikes. Indeed the Fed delivered on their promised 3 rates hikes last year and they’re looking likely to do the same again this year. Although Trump managed to finally get his tax reforms through at the end of the year, the sugar high from his election somewhat fizzled out as the year proceeded and he faces tough mid-term elections this year (with lots of House and Senate seats up for grabs).

The Euro-Zone performed better than expected through 2017 and has a brightening outlook. The ECB have signalled that they are likely to move away from the extra monetary measures (i.e. QE) and interest rate hike expectations have been brought forward by the market, which has made the single currency more attractive to investors. The next major things on the cards for the Euro-zone is how the Italian elections go in March and also how the ECB go about reducing/stopping quantitative easing.

The dominant issue for Sterling this year is expected to be Brexit again. It created lots of volatility last year and as the tougher trade negotiations are kicking off this month we expect this to continue. The priority will be to sort out a transition deal as fast as possible and if this can be achieved then we would expect some relief for Sterling. More near term is how successful Angela Merkel is in clinging onto power by forming a coalition government in Germany, as she is seen as somewhat of an ally to May’s government and thus smoother Brexit negotiations. Like last year, Sterling sellers are likely to be ready to pounce on any negative Brexit developments.

As usual, please keep us in the loop of your upcoming requirements this year, so we can help you navigate through this challenging market.