The sterling conundrum

10 January, 2017

Yesterday’s early weakness in sterling, on the back of the latest comments from PM May surrounding Brexit, took cable close to key support levels and the resilience seen through most of the post US election period has been unwound. You can see that better illustrated on EURGBP, where we have seen all of the move down to near the 0.83 level unwound as the cross has pushed above 0.87 to pre-election levels. The conundrum is between the uncertainties created by Brexit, against the fact that sterling has already weakened substantially over the past twelve months, making it look far more attractive from a valuation perspective, especially with cable trading near to levels last seen thirty or more years ago. In this context, it’s perhaps not surprising that we’ve see a divergence between 3M volatilities in cable and EURUSD, with expectations of future volatility in cable rising, the same measure for the euro falling. It’s hard to see calmer see for Cable, especially with this quarter seeing the anticipated triggering of Article 50 and possible parliament ratification of the Brexit decision, should the Supreme Court appeal not go the government’s way.

Overnight, we’ve seen mixed inflation data from China, with headline consumer prices falling to 2.1% (from 2.3%) on annualised measure, whilst PPI (largely commodity prices) rising further to 5.5% (from 3.3% previously). The data is indicative of more prices pressures to come, but for now the yuan has remained relatively stable after the increased volatility seen last week. Attention is turning towards Trump’s scheduled news conference tomorrow and the prospect of getting statements of more than 140 characters, this coming after Obama’s scheduled farewell speech today and the inauguration of Trump next week. As discussed yesterday, it’s pretty clear that we are seeing a stalling of dollar momentum, so the question is whether Trump can put further wind into the sails over the coming week. It could prove to be a hard task. Otherwise, the data calendar is on the light side today.

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