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Pound bloodied as May signs Brexit letter
Our prop desk is holding some long UK oil positions in the wake of the recent charge higher and there’s also a rather profitable AUD/JPY trade in play. Support for long USD/CHF is evident, whilst that short S&P trade is still open – although rather less on side than we saw earlier in the week.
Daily round up
A raft of comments from Federal Reserve members offered up some pace yesterday, whilst the landmark event for today is the UK’s official triggering of the Brexit process. This is all providing some meaningful direction for the relevant currencies, although it’s difficult not to think that despite the weight of direction being picked up, in both instances this only tells part of the story. There are some slightly more dovish tones creeping in from the Fed so this remains one worth watching, but it certainly justifies that tepid outlook for rate hikes into 2018.

Fundamental Analysis – Pound bloodied as May signs Brexit letter

We postured yesterday that with the triggering of Article 50 so widely expected, sterling would have little reason to retreat off the back of today’s formalities, but currency markets have been unwilling to hold this line. The pound has been under sustained pressure with gains of recent days being eroded in the last few hours although it’s worth noting that there has been a relative absence of UK economic data on hand to provide direction. This could change shortly as we have a flurry of lending data due from the Bank of England at 9.30am GMT. Anything that suggests borrowing is running too hot points towards a need for tighter monetary policy and may help provide at least some temporary support to the pound’s tumble.
The greenback posted gains through the latter part of yesterday’s session, supported by a flurry of comments from FOMC members, which generally supported the idea that we would see a further two interest rate hikes this year. Critically with US inflation having been on the up even before the presidential elections, the thinking is that Trump’s failures to enact reform so far, whilst potentially damaging for inflated equity valuations, shouldn’t have any real bearing on the direction of monetary policy. Obviously the caveat here is that a big equity market sell-off can pave the way for recession, but for now the backdrop is dollar positive.
Oil prices have been finding some much needed support in the last few hours with supply disruption out of Libya and a draw in US gasoline reserves helping lend a little support here. Obviously this needs to be put in context of the expanding output we’re seeing from the US and with Opec seemingly committed to keeping those quotas in check, any support here could be short lived. We have the weekly oil inventory data out at 3.30pm GMT so this could provide some fresh direction but with US storage facilities getting ever closer to capacity, this metric - in addition to the size of any build - will be attracting interest. Critically, running out of capacity is likely to widen the spread between US and UK crude prices. 

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice.
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