Sterling fall Turns to a Rout

Pound set to test year’s low

Even by a fickle FX market’s standard, the reversal in fortune being experienced by Sterling has been spectacular. Two weeks ago, the pound made a new high for the year following optimism about a hike in rates, there was talk of a breakthrough in Brexit talks and the economy while not doing brilliantly was holding its own.

Then, there was turnaround in sentiment towards the dollar, BoE Governor Mark Carney poured cold water on rate talk, and the continued issue of the Irish border again came to the fore.

Sterling fell to low of 1.3588 yesterday as more long positions were liquidated and traders continued to see that in the current environment the pound has very few redeeming features.

It is perhaps ironic that the fall in Sterling precipitated by the removal of expectations of a rate hike may in the end bring about a hike should the pound continue to fall as this would raise concerns over inflation. For now though, the immediate target appears to be 1.3460, the low for the year so far. A sustained break below that level brings the December ‘17 low of 1.3302 into sharp focus.

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Dollar continues to gain

In addition to its recent headwinds, the pound is also caught in the rally that is currently driving the dollar to new highs. Yesterday, the greenback reached 92.57 although it appears to have paused for breath overnight.

Speculation is growing over the employment data that is due for release on Friday with expectation that wages growth will be in excess of 3% which will all but confirm a rate hike, at the FOMC meeting following today’s, in June, and the headline will again be close to 300k. Given this report’s ability to spring a surprise, traders will be cautious about getting too far ahead of themselves following last month’s disappointing data despite a similar level of expectation.

The FOMC meeting which is currently taking place in New York is unlikely to spring any surprise particularly given Fed Chair Jerome Powell’s more reactive stance on monetary policy. On Monday, the Fed’s preferred measure of inflation was released. Core Personal Consumption Expenditure was in line with expectations and Powell may refer to this at his press conference later as the market studies his words for a more hawkish rhetoric and a further indication of a continued tightening of monetary policy.

Euro testing 1.2000

The 4.6% fall in the value of the Euro versus the dollar since it made a high of 1.2566 in mid-February is unlikely to concern the ECB despite the clear inflationary ramifications of a concerted fall in the currency as seen recently in the UK.

However, Jens Weidmann, the President of the Bundesbank who is making a speech on Friday which is expected to formally launch his candidacy for the Presidency of the ECB will no doubt touch on his concerns that inflation is set to rise rapidly, and attention needs to be paid to a tightening of monetary policy.

Yesterday, the single currency made a low of 1.1980 although it has managed to regain the 1.2000 level overnight.

G7 currencies are currently being dominated by the dollar which has been falling for a considerable time and still cannot be considered strong despite the current rally.

The ECB is content for the Euro to be reactive to global economic trends since the attitude of Mario Draghi, the current ECB President is that while the Eurozone economy continues to grow, and inflation is low the currency will, to a certain extent, take care of itself.

Versus Sterling, the Euro gained again yesterday as Sterling was sold aggressively. It reached 1.1335, again testing Sterling’s low from Mid-March.