Sterling outlook continues to worsen
19 July, 2018
Yesterday’s trading could prove to be pivotal for one Sterling exchange rates over the coming weeks and months. The pound has come under significant pressure over the last couple of weeks as Brexit and political uncertainty continues to weigh heavier by the week. In total 3 members of the cabinet have resigned in the last week before Theresa May squeezed through her Brexit amendments by just a few votes, with up to 14 of her own backbenchers voting against her. Recent events point further towards the possibility of a challenge to her leadership with more and more MPs disagreeing with her recent proposal to the EU.
Amidst all the political uncertainty there has been 1 small glimmer of hope for the pound with increasing speculation of a small rate hike from the Bank of England in August. Yesterday markets were awaiting the latest inflation figures as this could have the single biggest impact on this decision. Analysts were expected the headline figure to push back up to 2.6% from 2.4% which would certainly have led to increased speculation of a hike next month, with the markets already having priced in an 80% chance of this. Actual results, however, showed no change from 2.4% with core inflation actual dropping from 2.1% to 1.9%. Some analysts still believe a hike will go ahead as this figure is actually still in line with the BoE’s own forecasts in the last quarterly inflation report. The chances however and significantly decreased and subsequently, the pound dropped over 0.5% in just a few minutes without recovery. Even if a hike did go ahead there would likely be little gains for the pound such is the prior expectation and pricing in, however, a failure to deliver could affect exchange rates far greater.
Since September GBP/EUR has been in a well defined technical range trading sideways for nearly 10 months now. In the last 24hrs rates have dropped below this range and closed below for the first time which is a strong technical signal of a potential break out of this stable pattern, typically resulting in an extended move in the weeks to follow. In the current market conditions, it is looking increasingly likely that GBP/EUR will come under further pressure in the short term, with last years’ lows of 1.07 becoming and increasing possibility.
GBP/USD is now testing significant long-term support from when rates were at 1.20 post-referendum. A number of long-term technical signals have shifted to the downside in the last week which will keep the pressure on these rates in the coming weeks. Any further movements lower could trigger a new wave of selling back towards the lows of last year as a new downtrend takes over.
The Day Ahead
This morning we have one last chance for Sterling to recover recent losses and re-stabilise itself with the latest Retail Sales figures at 9:30 am, which will be the last major data release for the Uk before the Bank of England meet in August; and with parliament taking holiday from today for the Summer, there will be little going on to help reverse the dropping exchange rates. A very strong figure will be needed however and markets are expecting results around 1% lower growth than last month. If a further drop in exchange is something you do not have the budget for, contact your broker today and ask about our Forward Contracts to guarantee your rate or the future.
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