Yesterday we experienced yet another break for the pound, with late afternoon jumps topping at 1.2790 on the USD and 1.1590 on the EUR. Discussions went late into the night and were described as “constructive”. Right now passing comments such as these is all it takes for the pound to swing violently in either direction.
A 4.6% appreciation in the pound over the past five days highlights the appetite for a pound rally, and more so a Brexit deal. It very much is a case of see-saw movement, with pound strategists pricing in a GBPUSD move to as high as 1.40 on a deal strike with parliamentary approval, and a drop to 1.11 levels on failure to reach an agreement, a near 30% range.
We continue today with the pressure heavy on Boris Johnson’s shoulders as today brings around the last day to reach an agreement before the EU summit commencing tomorrow. This morning has started off negatively, with reports detailing a “slipping away deal” and chances continuously reducing.
Elsewhere, we see the JPY continue to collect worried investors money, as the US/China discussions go through another patch of friction. China has commented on “strong countermeasure” against the US, dependent on their legislative decisions around Hong Kong support.
The Eurozone monetary policy is, as expected, testing the limits of its potential, with reports showing that at the current pace of quantitative easing through bond buying the ECB could run out of bonds to buy in less than a year. We will be keeping a close watch on how the narrative covers the passing of the baton to the fiscal policy side following these concerns, with the EURUSD at the mercy of any developments here.
Key takeaways are that the large money managers and funds are publicly staying away from pound betting just now, with the risk-reward proving too weighted on the risk side, which really highlights the lack of clarity on the expected outcome, and thus the need for a risk management strategy for your currency requirements.
There are a number of available methods which can provide downside protection whilst allowing to benefit from favourable movement. Speak to your account manager for support on how to tackle the uncertainty inherent in the market.
Have a great day.
Author: Ross Hammond, Senior Corporate Account Manager