Forex Analysis

A Good Day For Sterling

The title may sound odd, but in light of the potential mess that the UK government finds itself in, we would argue that Monday was a relatively good day for the Pound given what today's series of events would have done in the past.  Fresh from opening up 30 ticks from Friday's close, Cable above 1.3300 tried to push for some better levels before London markets decided it was time call for some restraint.  Fast forward to the afternoon and the resignation of Boris Johnson set the cat amongst the pigeons and GBP fell to lows just shy of 1.3200 against the USD, and tested .8900 vs the EUR.  


Watching the price action, we sensed the market may have acclimatised to the view that a no deal scenario is a distinct possibility, but that this does not necessarily mean that the UK economy is about to implode.  Having received some pretty tepid growth projections for the next couple of years, the market is now prepped for a period of under-performance, though the introduction of monthly GDP readings this morning saw a 03% rise in May.  Pricing weakness in to a GBP rate below the 1.3000 mark may however be a temporary affair given that we have now effectively referenced the weak point, and time, on the economic horizon.  This is a round-about way of saying that much of the bad news is likely priced in, and we are back to considering - to some degree at least - valuation.  Naturally there will be a discount applied to the uncertainty ahead, but when longer term buying interest is waiting in the wings from the mid 1.20's, the propensity to sell into this area suggests Cable may be developing a consolidation range around, or maybe a little under 1.3000.

  

Traders may also feel that with Europe is not also the sea of tranquillity that EU officialdom purports it to be.  The latest wrangling over immigration shows initiated by the new Italian government shows there are stresses and strains within the union, and economically, the one track monetary policy regime is also showing signs of potential fracture.  The timing of rate normalisation is clearly being questioned in some quarters, and no surprises that Germany is among them.  As such, we could see resistance holding off the bid tone in EUR/GBP.  Coincidentally, EUR/USD has also discovered some support into the 1.1500-1.1600 area and is also combining to suggest a bearish take on GBP, while ongoing trade flow between the UK and Europe supports commercial buying.  It this fades, then there are good reasons to believe that a sharp readjustment in price is due here, with sub 0.8500 a conservative call at this stage.