Sentiment is everything right now in the currency markets. As such the 3% rally higher in GBP on Friday last week, was driven purely by this most human of emotions. Then there are the algorithms; the artificial intelligence and the machine learning that dominates FX momentarily – with modern advances in the way that fast moving markets such as the foreign currency exchanges work, it so often falls to ‘High frequency trading’ to attempt to learn where the next pip of the exchange is heading.
As we sit this morning it’s a case of no news is good news. We appear to have pared a small degree of the gains from the last trading day and will remain poised to seek further price direction queues. There has been plenty of media reporting, political manoeuvring and meetings behind closed doors. However, in terms of concrete news on Brexit, nothing yet is set in stone. We still sit in a binary situation; deal or no deal? So, whilst positive sentiment drove the Pound higher last Friday, we remain in a political no man’s land.
In practical terms at least, this has been welcome respite for the import community in the UK. As we are a net importer by GDP, this is far better news, for now. On the flip side, exporters who have been enjoying protracted lower levels in GBP related cross currency pairs are beginning to see exchange gain led profits dwindle.
Making sense of it all in the weekend press and newspapers has been difficult, almost impossible to decipher. The EU chief negotiator, Michel Barnier has had the air of a very diluted optimism. The question very much remains: can the UK Prime, Minister Boris Johnson get his new version of Brexit through the UK parliament. We are set for another very intensive week of negotiations, expect GBP to be volatile once again. This presents opportunities and indeed risk for FX hedging programmes for UK companies. Target orders specifically, could yield the best results in these currency market conditions.
Talk over the weekend from the Bank of England’s Dave Ramsden, discussing adding stimulus into the UK economy in the event of a Brexit extension or an absolute ‘no deal’ scenario has GBP traders rightly eyeing the interest rate markets. We note that Gold rebounded in Asia, always a bellwether for risk and uncertainty.
Whilst there are many other machinations in FX, such as US interest rates and the delay on tariffs in the US/China trade stand-off, it is Brexit and the outcome that dominates the UK trading session. Another pivotal period, ahead of an historic Saturday this coming weekend in parliament.
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