Sterling: Red lines amidst the political fog

When thinking of what to write to kick off the New Year, for example ‘Post Inauguration Dollar Performance’, Yuan Relevance, ‘How Many Times President-Elect says ‘Make America Great Again’, the obvious and only topic to discuss has to be closer to home.

Sterling has resumed its long-term downtrend from those lofty pre-Brexit highs (1.50 anyone?) and is now seemingly on the way its flash crash swing low of 1.20.

What has been interesting in this new move lower is the total disregard for positive domestic data. The U.K economy seems to be keeping calm and carrying on if we pay attention to the latest PMIs, House Price data and Industrial Output figures. However Theresa May’s statement at the weekend indicate that the red lines have been drawn - Britain would prefer to leave the EU single market and keep control of its borders.

What we can certainly deduce from this is that politics is trumping any other UK news. New terminology have now entered the financial lexicon, like the Brexometer, courtesy of HSBC and we have to agree that the pound has become a political football. Sadly, here we also note that most of the UK haven’t won anything on a football field for decades, so is this a sign of things to come?

What is key for us at Faraday and far more important to us than amateur political punditry and poor football jokes, is the direction of prices and how we can extrapolate trades and recommendations. We are not here to second guess the tactics or non-tactics of politicians. However, charts and technical analysis most certainly ignore all the current political fog, which may become even thicker in the next few months.

We think there are many bumps in the road to the UK extricating itself from the EU. For what it’s worth, the Prime Minister’s tactics of seemingly threatening to walk away may seem like common sense in a negotiating process, but it only means uncertainty and more selling of the U.K’s currency. This will, therefore, enable cable to drop through the psychological 1.20 region which means any sterling pullbacks will be shallow and should be faded. Fanciful targets from a few months ago of 1.15 and 1.10 are a lot more real now.