There was no getting away from the drop in GBP yesterday as the press built on Theresa May’s plans for Brexit and fear selling took over into the open. We continue to point to sterling’s vulnerability to headlines, especially around Brexit but the details over the weekend were no different to comments already made by May the previous week, suggesting she was willing to give up access to the single market in order to control boarders. That didn’t stop GBP selling and sterling pairs all opened the trading week lower with GBPUSD dropping below 1.2000 before recovering, while EURGBP traded above .8850. Sterling recovered through the day however, weakness in the currency at this point is positioning for a worst case scenario and we would not be surprised to see a stronger GBP should markets get behind May’s plan for Brexit.
Sterling wasn’t the only currency under pressure and the USD has faced selling overnight, I was wondering how long markets would take to focus on Trumps campaign comments relating to the USD. The Greenback has soared since his victory and early comments about Fiscal support, however for much of his campaign, he rallied against the strong USD, last night we saw his first comments on the subject as he mentioned “the dollar was already too strong” in an interview with the WSJ on Friday. The US was closed yesterday for MLK day. European stocks rallied lead by firmer bank stocks, although overnight Asian markets traded lower and we’ve seen red on the European open as well this morning. Safe haven flows seem to be the name of the game so far, JPY has been an out-performer overnight, USDJPY trading to 6 week lows, while EURUSD trades back up to 1.0660 where we have seen EUR sellers emerge in the past.
There is no getting away from the Brexit talk today, but the pound has started the day on a firmer footing. As mentioned above, recent sterling sell-offs have all been headline driven, not based on any real data or information, simply the fear of a bad outcome. What many have not learned since the original Brexit vote is that things are unlikely to be as bad as the worst case scenario and in any case things will be slow to deteriorate should there be trade and boarder issues. With current GBP positioning, this would suggest there is upside available especially if May put forward a credible plan that reassures markets. Speculation around the soft/hard Brexit is pointless, we need to see a plan of action in place and at 11.30am today we expect to get just that from PM May. On the fundamental side of things, the UK economy continues to outperform, and last night BOE governor Mark Carney suggested they would be looking to take a more hawkish view on inflation and the economy. CPI figures just released once again beat expectations up to 1.6% year on year from 1.2% expected and rapidly approaching the BOE’s 2% target. Again this has helped GBP this morning as it continues to surge from yesterday’s lows. EURGBP sitting on support around .8760, a break below there favours progression towards .8710 with .8650 area attracting below that. GBPUSD has closed the gap lower from Friday’s close to Sunday nights early open, last week’s highs above 1.2300 likely providing resistance to any moves higher but technical are really out the window for today, it’s all about PM May.