Morning Brief – One step forward..

One step forward..

Two steps back. The Pound at least is on track to follow this frustrating course. Having rallied after the general election result became clear, a combination of profit taking and renewed exit uncertainty has caused the Pound to have lost a lot of value. Despite the election result and immediate reaction, the Pound has had one of its worst weeks in 2019.

For those still yet to exchange money on their SGM cards for their festive holiday, fear not, the Pound still trades well above both its 2019 median and its opening price at the beginning of this year. Importantly, the Pound has crossed through important psychological and material resistance levels, adding conviction to the belief that investors consider the Pound a risky place to be on the eve of 2020. Limiting my conviction behind this assertion is the fact that with the Christmas holidays upon us, desk absences and limited commerce mean that trading activity and thus liquidity is considerably lower. It follows therefore that more noise and volatility can appear in a market with variations in the spot value of currencies not necessarily indicative of value or path and rather responsive to minor imbalances in supply and demand.

It is unlikely for Sterling to post significant gains whilst the threat of Johnson’s 31st December 2020 legal deadline is in sight. Accordingly, a cap below 1.43 (Sterling’s 2018 post-Brexit high) and low-mid 1.25s whilst not rocket science is a good guide to your 2020 GBP range. We should expect to see a repeat of the extortionate implied volatility pricing we saw in options markets ahead of the general election as the trade deal deadline approaches. If there is no evidence of sufficient progress on the trade deal then GBP should sell off into year end. However, if a deal looks like it could go either way then expect volatility, expensive volatility pricing, and significant Sterling moves on minor headlines.

It’s Christmas Eve and that means that in just two hours time (assuming you read this at 9AM London time!), Santa will be hitting Wellington in New Zealand (assuming he arrives at midnight). You get the idea right? It’s 13 hours ahead. With trade war optimism instilled in markets since the start of December, Santa might be well advised not to buy his mince pies and Rudolph’s carrots on his first few stops – he’ll pay a pretty penny! What with the Euro’s sell-off this month following an uncertain ECB presidential handoff, if Santa’s coming from Lapland (Finland) and selling his Euros, he’ll need to dig even deeper into those pockets.

Discussion and Analysis by Charles Porter

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