Sterling suffering Brexit Blues
March 8th: Highlights
- Consumer spending slowing down
- Dollar takes a breather
- House price inflation cools
Pound Grinds lower
After the savage fall following the decision to leave the E.U., Sterling has traded in relatively narrow ranges, with the economy holding up well in the face of “Hard Brexit” concerns. There have been a number of factors with the potential to provide the impetus for another serious fall, but traders have continued to believe that Sterling is undervalued against its trading partners currencies.
Yesterday the pound fell to a seven-week low amidst concerns over the ability of the consumer to prop up an economy that is clearly slowing down. Cable reached a low of 1.2183 before regaining the 1.22 level and closing at 1.2207, down 0.25% on the day. The full effect of Brexit fall has not completely fed through into the economy but the data is now backing up sentiment and a test of the significant 1.2000 level cannot be discounted for much longer. A close below the support at 1.2180 may see buyers fall away and a new lower range with a bottom at 1.2080 could be seen. There is little doubt that traders see 1.2000 as the medium term bottom for the pound, but a short sharp test below that level, hunting for stop losses, cannot be discounted.
A number of minor issues have come together to place the pound firmly on the back foot: Another defeat for the Government over Brexit in the House of Lords, weaker consumer spending data, a drop in the rate of house price inflation and regional problems with devolved assemblies in Scotland and Northern Ireland have combined to paint a bleak picture of the short term prospects for the currency.
One further issue which raised its head yesterday is concern over Charlotte Hogg, the new Deputy Governor of the Bank of England. It seems she omitted to tell her employers of a potential conflict of interest over the fact her brother is a senior official at Barclays. This is the type of issue that is quickly dealt with and forgotten but when added to the list of minor irritants it becomes another matter to drive the currency lower.
Today’s budget, delivered by the Chancellor of the Exchequer, will outline the Government’s tax and spending plans for the next year. All eyes will be on his comments about the cost of Brexit and how it will be paid for. He has already mentioned a “war chest” of £60bn but how that will be achieved will interest traders.
Non-Farms speculation places hold on dollar advance
The dollar has been in a reactive mode over the past few days. The dollar index has barely moved from its median rate of 101.75 after reaching a high of 102.26 last week.
China reports rare trade deficit
This signals a pickup in global growth in the first couple of months of 2017 and led the Australian dollar to touch resistance at 0.7600 against the dollar. There are strong exporter orders capping the AUD between 0.7600 and 0.7620 for now.
Asian stock markets are close to recent highs led by buoyant growth across most parts of the region. There has been a (slight) pickup in inflation in Japan which has led traders to believe that there may be a tightening of their ultra-loose monetary policy as early as the second quarter. Watch this space.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”