- Theresa May triggers Brexit
- Sterling strengthens on US influences
By Ricky Nelson
Sterling has been whipped around in the 1.210 – 1.265 range for the last six months and both extremes of that range were tested in March. Brexit, for once, was not the sole reason for volatility, as the US Federal Reserve sought to head off rising inflation with a third interest rate rise since the 2008 financial crash; and the second in three months, taking the base rate to 1%. The US central bank set aside concerns about the impact of higher rates on consumer spending to confirm projections that it is prepared to increase rates several times this year to control rising prices, as inflation pops above 2%. The US Dollar rallied on the news, as it seems that the Federal Reserve will remain hawkish, although most expect them to peak around 2%.
Market nervousness as nature and scope of Brexit debated
The market had been incredibly nervous of the UK looking to negotiate the hardest of Brexits and UK Prime Minister, Theresa May, had made it clear that the UK would be leaving the single market and look to take control of immigration once negotiations had been concluded. The Pound has been sold as a result, as capital outflows increased with investors concerned about growth in the United Kingdom over the next couple of years. Final arguments within the UK continued up until the last minute, however, Mrs May was able to trigger Article 50 on March 29th and the Pound had already begun to rally.
Next steps for the UK-EU relationship
We are now awaiting a detailed response from the European Union, not due to meet until April 29th when they are expected to adopt their Brexit guidelines. Until then, we are in a bit of a vacuum and it is unlikely that there will be any change in sentiment unless we get some clarity around the issue. The EU has insisted that there can be no parallel talks and that we cannot move forward with trade discussions unless there has been an agreement on the “divorce”. The negotiations will be tricky, especially as all the EU member states will have a domestic audience to appease. Elections in France and Germany will complicate matters further. In the short term, it is difficult to see how Sterling can rally.
Federal Reserve sought to head off inflation with a third interest rise since 2008
US influences on Sterling strength
Attention will turn to President Trump and his meeting with Chinese Premier Xi Jinping this week. Mr Trump has already labelled the Chinese as currency manipulators. I guess we will have to wait for the official “handshake” to see if there is any further friction between the two leaders. Non-farm payroll data is also due later this week, however, rhetoric from EU/UK policymakers will most likely have more impact on the short term direction of the Pound.
US Dollar Buyers
The range has been set for the last 6 months and the 1.2550/1.2600 area is solid resistance to target. We are close to that level at the moment so it may be prudent to begin reducing any near term exposure.
US Dollar Sellers
A break above 1.2700 would suggest a test of 1.3000. For now, this looks unlikely. If you have time, 1.2200/1.2250 is decent support, as we expect the market to range trade for the time being.