Sterling remains in the eye of the Storm
December 29th: Highlights
- 2017 ranges narrow
- Brexit dominates all aspects of economy
- Euro to be driven by Q1 Italian election
Sterling to end year above monthly average
The average monthly range for the pound versus the euro has been 406 pips in 2017 with lower volatility in Q4 only averaging 318 pips, with this month, naturally, being the lowest at 263 pips as traders reflect and prepare for the commencement of negotiations over a future trade deal following Brexit. The pound has averaged a rate of 1.1441 over the past twelve months. This level provided resistance in December.
Versus the dollar the pound has fared a little better than against the single currency as the greenback suffered an overall fall of a little over 10%. Following the significant fall in June 2016 due to the result of the Brexit referendum, the pound has risen from a low of 1.1986 in January’17 to a high of 1.3658 in November. Most of Sterling’s volatility has been driven by the general weakening of the dollar which has faced a significant year, the first of Donald Trump’s Presidency.
Brexit to dominate 2018
The political fallout will continue as Parliament grapples with its overall remain credentials despite having to engineer a Brexit agenda. The Prime Minister remains on shaky ground as she tries to form set of policies and proposals that satisfy both sides in her Cabinet and the opposition struggle to come to terms with its overriding remain agenda despite many of its voters supporting departure from the EU.
The economy continues to suffer primarily due to the lack of business investment driven by uncertainty over what Brexit will mean to manufacturers and trading businesses. The City faces uncertainty and an unparalleled challenge to its position as the preeminent financial centre in Europe, if not the world.
The consumer, the lowest common denominator of the economy, is starting to turn away from its support as inflation remains high and wages lag. The hike in interest rates in November served to (apparently) reverse the knee-jerk reaction to the Brexit vote but as hikes have a more immediate effect than cuts, it is the consumer who faces a drop in spending power.
Italian election announcement to drive Short Term Euro volatility
The positive effect of the withdrawal of economic stimulus will now be countered by the political uncertainty as well as the losses the ECB is likely to incur on the sales of assets it purchased as part of its stimulus package in 2015/6.
Analysts tend to dwell on bad news when forecasting the prospects for an economy. With G7 currencies, particularly the dollar, pound and euro facing headwinds, the Yen could prosper as rumours start of a tightening of monetary policy as concerns over the long-term effect of negative rates emerge.
Finally, the early stars of the New Year are likely to be the currencies of the “Dollar bloc”; the Canadian, Australian and New Zealand dollars, all appreciating on the back of higher energy and commodity prices.
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.”