Pound Sterling has finally staged a rally on global FX markets as an heavily oversold currency is bid on profit-taking by traders.
- The Pound to Euro exchange rate today: 1.1113
- Euro to Pound Sterling exchange rate today: 0.8998
- Pound to Dollar exchange rate today: 1.2267
GBP has bounced against most G10 currencies in early mid-week trade.
This is the first day of gains in five trading days and is long overdue as the currency had become grossly oversold.
Profit-taking by traders who have been betting against the currency is seen as being behind the bounce.
Note that because there is such a large number of bets going against Sterling any reversals of direction - such as that which we are seeing - can be quite large as stop-loss positions are triggered.
"A squeeze on a market that was aggressively positioned Sterling-short probably also played a role," says Piet Lammens at KBC Markets in Brussels.
Others see Prime Minister May as being behind the moves.
"GBP leads the gains, some stability returning after PM May last night conceded that parliament should be allowed to debate and vote on the EU exit plan. The practical details of this are not yet clear, although the government is likely to retain flexibility on the detail of the terms of exit," says Adam Cole at RBC Capital Markets.
Those with outstanding currency payments should note that relief could be short-lived.
"The UK currency rebounds on reports that UK PM May will accept the UK parliament to vote on the Government Brexit plans. Markets might see this as easing the risks for a hard Brexit. However, it is still early days to draw firm conclusions," says Lamens.
But, GBP Vulnerable to Further Falls
We would expect any bounces in Sterling to be short-lived and technical in nature.
On momentum alone we would expect further losses to be suffered in GBP/USD as big breaks like that witnessed on Friday the 7th October tend to enjoy nascent follow-through action over subsequent days.
GBP/USD plunged to the lowest in more than three decades last week on speculation the UK economy will weaken in the aftermath of Britons’ June vote to exit the European Union.
At one point last week, GBP/USD had plummeted by around 10%, to a low below 1.15, before recovering some poise.
"Technical studies argue prices may well now settle into a fresh range either side of 1.2250 or so which implies upside scope being limited much beyond 1.2750 and possibly even 1.2500 going forward. Support at 1.2025 then 1.1875 could limit downside risk initially but both levels are vulnerable to attack going forward - as is 1.1500 in due course," says Lucy Lillicrap at brokers AFEX in London.
At about 1.24 against the US Dollar it’s down almost 16% this year, making sterling the worst performer among 31 major currencies tracked by Bloomberg.
GBP/EUR also took major losses on Friday moving from 1.1324 to 1.0934.
Like GBP/USD, the pair managed to retrace some lost ground in the London session and the pair kept to a 2.22% range between upper and lower limits of 1.1232 and 1.0988 respectively
"Bearish sentiment continues to prevail as dovish comments surrounding tough negotiations dominate the headlines. The harsh reality is that the UK is sailing into the unknown. Economist and technical analysts normally examine and reflect on what has happened before or the ideas of ‘history repeating itself’. Given that Brexit is a brand new “historical event”, it is easy to see why sterling is so volatile when newswires break stories surrounding it," says Yi Ling Huang at Smart Currency Business.
"In real effective terms, Sterling is 10% lower than it was in 1992 after leaving the ERM and is now weaker than it was after Lehman," points out Kit Juckes at Societe Generale in London.
Juckes warns that the demise of the UK currency could soon start impacting a broader range of assets:
"Press comment is now shifting to embracing the positive effects of a weak Pound and in due course that'll be true but any further weakness from here might simply reflect loss of confidence and be bad for UK assets (gilts, equities, house prices, you name it...) in general.
"The market's very short, but if Sterling weakness starts to feed weakness across assets, we will have all the conditions for a classic overshoot to start."
Our technical analyst Joaquin Monfort reports that on a number of counts Sterling is looking oversold and therefore the big risk over coming days is likely to be to the upside as the market stabilises.
To be sure, a correction is due at some stage, but calling the timing on such a move is the tricky part.
Brexit risks matter more than the data for the GBP. We have been recommending to sell the rallies in GBP, but also believe that GBP will eventually strengthen if the data remains so strong; getting the timing right is tricky, but it is a matter of time,” says Athanasios Vamvakidis at Bank of America Merrill Lynch.
What is guaranteed is a continuation in volatility.
“While we suspect the sell-off is overdone, until the dust settles, the Pound is likely to remain especially susceptible to bouts of volatility,” says Adam Chester, Head of Economics, Commercial Banking at Lloyds Bank.
The Soft-Brexit Fightback
Sterling is now primarily senitment driven - data does not seem to hold much sway in these days of Brexit.
The recent selloff was triggered by signs that the UK Prime Minister would seek a hard-Brexit - i.e one that is willing to sacrifice unfettered access to the single market in order to attain full sovereignty.
However, the law of diminishing returns would state that for headlines to achieve further GBP weakness they would need to become increasingly negative in a manner that hard Brexit becomes morphs into something akin to rock-solid-steel-brexit.
This is unlikely.
The Government was always going to lay a hard set of demands down ahead of negotiations with the EU in order to give themselves ample space to row back on.
When that row-back starts expect the pull on Sterling to be positive.
We would expect Sterling to strengthen were news headlines to start pointing to the likelihood of a soft-Brexit taking place.
While something juicy is yet to emerge make no mistake that those who would advocate for a soft-Brexit are legion.
Reports suggest Theresa May is coming under growing pressure to allow MPs a vote on membership of the European single market, with MPs from all mainstream parties arguing that the referendum result did not amount to a vote for "hard Brexit".
Conservative MP Stephen Phillips, who backed Leave in the June 23 referendum, warned against the "tyranny" of denying MPs a vote on the Government's stance in upcoming withdrawal negotiations under Article 50 of the EU treaties.
And former attorney general Dominic Grieve cautioned that the Government could be brought down if it tried to force through a new deal with the EU without MPs' approval.
"Given a divided country and a narrow majority, the politics could change, particularly if the prospect of a more disruptive Brexit starts to impose a visible economic cost," says Jacob Nell at Morgan Stanley.
Buying Euros - Where you Stand
The spike down to the 1.06-1.-5 region last Friday has seen most major technical support levels broken ahead of the 1.02 lows set back in December 2008.
Although we have significantly retraced, momentum has breached its recent highs, and the pair closed below the psychological 1.11 level.
The best British Pound to Euro exchange rate of the year to date (past 365 days) was 1.432 achieved on 2015-11-19.
Today's exchange rate is at 1.109, this is 22.56% off the best exchange rate of the past year-to-date.
The best British Pound to Euro rate of the last month (last 30 Days to date)
was at 1.1873, today's conversion is 6.59% off that rate.
Buying Dollars - Where you Stand
GBP/USD managed to close last week near post “flash crash” highs, rallying more than 200 points from London session lows at 1.2228.
Short term sentiment around GBP is likely to remain bearish and the market has been given fresh potential downside targets to aim for courtesy of the flash crash.
Bloomberg’s median low was set at 1.1841, Reuters traded low is set at 1.1491.
The best British Pound to US Dollar exchange rate of the year to date (past 365 days) was 1.5508 achieved on 2015-10-15.
Today's exchange rate is at 1.2417, this is 19.93% off the best exchange rate of the past year-to-date.
The best British Pound to US Dollar rate of the last month (last 30 Days to date) was at 1.3346, today's conversion is 6.96% off that rate.