Sterling spike fading fast

14 July, 2016

Rob Bastin

Yesterday David Cameron officially left number 10 as Theresa May prepares to move in and become the new Prime Minister. The markets have been buoyant this week with the assurance of our political situation giving Sterling some much needed relief, gaining as much as 5 cents against both the Euro and US Dollar from last week’s lows. This movement is however only the first proper correction since the fallout of the Referendum vote 3 weeks ago, and should certainly be seen as a buying opportunity rather than a signal of better things to come.

Sterling dropped 2 cents against the Euro yesterday as the selling came in hard and fast at these higher levels to continue and resume the strong downward trend, a strong signal that we may have already seen the peak buying opportunity in recent days. This move occurred despite the absence of any UK data and with very poor Euro-zone results that would typically see GBP/EUR rates increase. Industrial production in the Euro-zone posted annual growth of just 0.5% against forecast of 1.4%.

The market’s focus is now completely on the bank of England who meet today at 12pm for their monthly interest decision. The political situation is largely resolved and any further details on invoking Article 50 and negotiating our exit from the EU will likely take us to the end of year or beyond. Last week the Bank of England advised the markets that they intended to further ease monetary policy ‘this summer’ meaning that a potential rate cut, or adjustment to the current QE programme is likely to be announced as early as today. Either of these actions from the Bank of England would heavily dent the value of Sterling and will almost certainly be the trigger for the next downward push. Some will argue that action is more likely to be in Augusts meeting, which could provide some short term relief to maintain these better buying levels for a little longer if no action is taken today. We are however likely to get at least 3 of the 9 members voting for a rate cut and this alone could be enough to weaken Sterling further from its current higher position. Either way if you have a requirement to sell Sterling and buy another currency in the weeks to come, make sure you keep a close eye on today’s events.