FX Update – May 13 – Sterling Struggling


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By: Stuart Cowell

The Pound has been unaffected by dismal UK data, with markets long since desensitized to bad economic figures, which, as the UK finance minister Sunak put it, “are not a surprise,” given the domestic and global lockdowns. UK preliminary Q1 GDP contracted 2.0% q/q while March industrial production contracted 4.2%. Sterling had been trading heavily into the data release, and has remained heavy since. Cable edged out a three-week low at 1.2251, with the UK currency concurrently printing a three-week low against the Euro. The uncertain tone in global equity markets has translated to weakness in the Pound, which has developed a quite strong positive correlation with stock market direction during the pandemic era so far. At prevailing levels Cable is in the lower reaches of the range that’s been prevailing since early April, which in turn marks a consolidation of the gains seen out of the 35-year low at 1.1409 that was seen in mid-March. The key 61.8 Fibonacci retracement level at 1.2450 marks the top of the consolidation whilst the 50.0 level at 1.2250 provides a floor.

Despite the high infection rate and death total in the UK, this week the country has initiated a baby step toward reopening its economy this week, with non-essential manufacturing reopening. However, the government continues to struggle to clarify and simplify its “stay alert” message as many workers try to return today.

The UK and EU are, meanwhile, amid the next round of trade talks. The British government has continued to insist that there will be no delay in the UK’s end-of-year departure from its Brexit transition membership of the EU’s customs union and single market. The UK has until July 1st to commit to this, so the pressure is on negotiators. Markets will continue to factor in the risk that the UK will leave the EU at the end of the year without a new trade deal, as many analysts see there is insufficient time to negotiate a new deal, even though the two sides are starting from perfect equivalence.

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