Of all the New-Year topics to cover -- US dollar Performance, yuan relevance, Donal Trump et al -- the obvious topic has to be the British pound.
Sterling has resumed its long-term downtrend from those lofty pre-Brexit highs (1.50 anyone?) and is now seemingly on the way to its flash-crash, swing-low of 1.20.
What has been interesting in this new move lower is the total disregard for positive domestic data. The U.K economy seems to be relatively calm, particularly if you examine the latest PMIs, House Price data and Industrial Output figures. However Theresa May’s statement at the weekend indicates that red lines have been drawn -- Britain would prefer to leave the EU single market and keep control of its borders.
What we can certainly deduce from this is that politics is trumping any other UK news. New terminology have now entered the financial lexicon -- like 'Brexometer', courtesy of HSBC, which leads me to believe that the pound has become a political football. Sadly, we have to note that the UK hasn't won on the football field for decades, so is this a sign of things to come?
What's key for us at Faraday and far more important to us than amateur political punditry and poor football jokes, is the direction of prices and how we can extrapolate trades and recommendations. We are not here to second guess the tactics or non-tactics of politicians. However, charts and technical analysis most certainly ignore all the current political fog, which may become even thicker in the next few months.
We think there are many bumps in the road to the UK extricating itself from the EU. For what it’s worth, the prime minister’s tactics of seemingly threatening to walk away may seem like common sense in a negotiating process, but it only means uncertainty and more selling of the U.K’s currency. And that will cause cable to drop through the psychological 1.20 level, which means any sterling pullbacks will be shallow and should be faded. Fanciful targets from a few months ago of 1.15 and 1.10 are a lot more real now.