Volatility Increases this Week. What’s Next for the Pound?

. 3 min read

Sterling surged yesterday afternoon, reacting positively to news that Brexit negotiations had progressed between the UK PM Boris Johnson and his Irish counterpart with Leo Varadkar stating talks were “very positive and very promising” and that he can “see a pathway towards an agreement in the coming weeks”.

The pound posted its biggest one day gain in seven months jumping close to 2% against the dollar and 1.5% against the euro on the news. The size of the move was largely attributable to the fact that markets had pretty much written off the probability of any progress at the start of the week. The mood with GBP traders however, seems cautious rather than confident, given the timescales for a deal to be done.  

The question is, what has changed? No specifics were released but you would assume that a compromise of some sort has been agreed for the Irish border. Whether these changes are acceptable to the EU and DUP are likely to be the next challenge and the silence on what was discussed will no doubt be due to the sensitivity around how these proposals are communicated. Following this announcement talks that were previously cancelled due to a lack of progression, will continue in Brussels today when Brexit Secretary Stephen Barclay meets with the EU’s chief negotiator, Michel Barnier.

This comes alongside some better than expected U.K. numbers on GDP, which means we avoid a technical recession. This print for the NIESR at 0.5per cent was somewhat hidden behind Brexit news. This was just the tonic GBP needed after a languid week of uncertainty and poor productivity news. GBP crosses were the biggest movers especially the Commonwealth bloc of AUD, NZD and CAD. We have been saying recently that this is where we could see the real gains if a deal is struck and (importantly) agreed in Brussels. We could see the critical 2.00 level breached in GBPAUD and GBPNZD if the talks do yield compromise on both sides. For importers at least, let’s hope so.

Overall, we have seen an increase in sterling volatility and would expect this to continue in the days ahead with fundamental data releases largely taking a back seat as news from Westminster and Brussels continues to dominate.

With time running short we also have to be mindful of the potential for positive or negative news to be released over the next few weekends when FX markets are closed. This weekend and next especially when the U.K. parliament will sit for the first time on a Saturday since 1982 in preparation for the possibility that any last minute deal agreed at next week’s EU summit will need to be ratified in the House of Commons. The ramifications for the pound could be extreme when currency pairs resume trading late on Sunday evening.

Elsewhere the rhetoric ramps up in the US China trade talks with a ‘partial’ deal on tariffs looking more likely also. So, this has had a major effect on currencies like the JPY, CHF and indeed Gold. These currencies traded as the bellwether of geopolitical risk. For now these currencies have seen selling overnight, as the currency markets seek value elsewhere.

For businesses exposed to currency risk It makes it all the more important that the short term risk events are addressed sooner rather than later with appropriate protection put in place.

Whether this be hedging a proportion of your forecasted requirements if you have not already done so or by utilising market orders that provide protection and the ability to purchase currency 24 hours a day if a specific target or protection level is achieved.

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