Sterling-US Dollar rate volatile - to say the least

Sterling-US Dollar rate volatile – to say the least

The Sterling-US Dollar exchange rate once more attempted to break into new lows in January – fortunately, the 1.2000 level is still proving incredibly resilient. The Pound took a battering as a speech from Theresa May was leaked to the press announcing that she would not seek to hold on to elements of EU membership and that she was looking to take the UK out of the single market in order to gain full control of the UK's borders. She said that the days of the UK making huge monetary contributions to the EU will end, although she would ensure that the UK remained a close friend of the EU and that the success of the Union remained important. The leak also stated that they expected that there would be a correction in the value of the Pound, which meant that Sterling was crushed on the open. When she actually made the speech and announced that the UK parliament would be consulted before Article 50 was triggered, the Pound soared. An excellently stage managed piece of good news for the government!
 
The Supreme Court confirmed that the UK government could not trigger Article 50 without the authorisation from Parliament; they also decided that UK ministers were not obliged to consult the devolved assemblies. The vote was passed for Article 50 to proceed, so Prime Minister May should be able to commit to her timetable and begin negotiations by the end of March. For now, the Pound has remained resolute, but it remains to be seen if any rallies will be sustainable once negotiations begin in earnest.
 

President Trump starts his Administration with a bang

President Trump has begun his term in office in extravagant style, by beginning a war of words with the media and signing a plethora of executive orders that many thought would simply be campaign rhetoric. He has certainly been bold; and if he continues in the same vein, then we are in for an entertaining four years. Stock markets have been buoyed as he vowed to cut regulation and corporate taxation. During his election campaign, he also pledged increased infrastructure spending, which should see inflation start to creep upwards and strengthen the dollar. The Federal Reserve has already stated that interest rates may have to rise three times this year, so the US Dollar should continue to find support.
 
Comments emanating from President Trump’s aides would suggest that they are not totally enamoured with a strong Dollar policy and may verbally intervene if the Dollar strengthens too quickly. In fact, Mr Trump himself has stated that American companies have been hamstrung over the years because of currency devaluation by other countries. Both fiscal and monetary policy going forward should support the US dollar; and for the time being, any concerns over a stronger Dollar may simply slow the pace of strength, rather see a change in sentiment.

Guidance for buyers and sellers of US Dollars

Near term direction for the Pound came in the form of the Quarterly Inflation Report, where interest rates were held and the Bank of England gave a less gloomy outlook for the UK economy. Markets were anticipating a more hawkish report, considering the better than expected Gross Domestic Product (GDP) growth into the year end. However, the Pound dropped by 2% on the announcement.

Buyers

The exchange rate is still trading in a fairly tight range and I would expect that to remain the case for the time being. A good target would be close to the year’s high, at 1.2600. A concerted break below 1.2000 would be very disappointing and anything below 1.1800 could lead to significant further losses.

Sellers 

We are still at the very low end of the GBP-USD’s overall trading range. You should be able to leave protection above 1.2650, looking for a retest of the January lows of 1.2000. The momentum indicators look a little overbought (for the Pound) at the moment, suggesting that the current move higher could soon run out of steam.