- Pound still under pressure
- Political uncertainty driving the currency market
Sterling has been trading in a very narrow band this year as traders look for more clarity before putting on new positions. The Pound still looks under pressure particularly as some of the economic data has begun to deteriorate. Retail sales figures for January were much weaker than expected and it now seems that consumer spending has begun to slow which would be terrible news for the UK economy if it continues. Household spending has been a key driver of growth and there are signs that is also beginning to wane. The lower Pound is already feeding into the inflation figures which are likely to rise towards 3% by the end of the year according to the Bank of England. Additionally rising house prices have contributed to household demand in recent years but with house price inflation slowing, this could further erode consumer spending going forward.
Politics rather than economics are driving the currency markets at the moment and as we appear to be moving towards a hard Brexit and perhaps alienating our largest export market traders are understandably nervous. Political uncertainty may well reduce capital spending which would also be a negative for the Pound. As we get closer to pulling the trigger on Article 50, the Pound is expected to remain under pressure. Once negotiations begin in earnest, it may become apparent just how far apart the two sides are and that could be the catalyst for the next reduction. The one caveat is that if a quick and robust agreement can be made, then the short covering would be extreme and the Pound could soar aggressively. It is just as likely that no agreement at all will be reached and the UK could walk away after two years of negotiations without any deal in place at all. However, if markets thought that were likely, the Pound could head towards parity.
Apart from the potential triggering of Article 50 the Federal Reserve (FED) meeting on March 15th is probably the next biggest event risk for the Sterling Dollar exchange rate. The possibility of a rate hike has temporarily overshadowed President Trump and the antics of his administration. Inflation has picked up and several FED members, including Chairwoman Janet Yellen herself have been more hawkish recently. The odds of a hike this month are now at 50% and if that were to materialise the Dollar should strengthen significantly as traders bet that we will actually see the three rate hikes that have been promised. Even if we do not see a hike that will most likely only offer slight relief as investors look towards the next meeting. It seems that it is only a matter of time.
The Pound has been trading in a narrow band since the turn of the year and 1.2650 is now solid resistance. I cannot see the currency breaking significantly above there. A break of 1.2000 would suggest a test of much lower levels so you should leave short term protection below there.
These are still good levels to reduce exposure but it seem clear that 1.2650 is a decent level of resistance. Leave protection above there hoping to see a break below 1.2000.
Article supplied by Halo Financial, March 2017
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