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Sterling goes from EU to me

Changes in Central Bank monetary policy have escalated the normal trajectory of FX so far this year. More QE and a combination of rate reversals in the US arguably resulted in the, well documented, yield curve inversion that resulted in a big bout of market volatility. A combination of geo-political narrative and supportive central bank action led to a higher implied volatility across all major asset classes as investors tried to ascertain if macro and corporate data was a true reflection of the macro outlook.

The FX market has been extremely volatile led by a number of domestic and international factors. The BoE initially guided towards a rate cut in the event of a no deal Brexit but then moved towards guiding the market towards a rate hike if we achieve an orderly Brexit. USD, in a similar fashion had a big reversal as the Fed Fund Futures were pointing towards rate hikes which was also reversed into a series of rate cuts (projected 3 hikes this year turning into 3 cuts). This alongside trade tariff pressure continued to pressure USD over the last 6 months. The ECB have announced open ended QE and the BoJ continues to supply ample stimulus to be supportive to the economy.

Ultimately the market has reacted positively to Central Bank action (in effect easing lending and credit conditions) propelling some equity markets to new all-time highs. Investors so far seem to have taken comfort in the promise for Central Banks to act if downside risks prevail allowing inflows to continue and the VIX to drop.


The news that the Brexit party will not contest the 317 seats won by the Tories (also announced today they won’t contest any Tory targeted seats) led to a big spike in £ and also domestic names that maintain a Brexit discount -namely Banks, Retail and Housing.

All eyes are not towards the December general election and the road trip to canvass votes has started in earnest. After waiting 3.5 years then next few weeks will determine who and how the political stalemate in the UK will end. It is unsurprising that the polls are changing on an hourly basis, given what is at stake and both Boris and Jeremy are vocal on how they will deal in both in the run up and aftermath of the UK’s membership of the EU. This in-turn can create huge swings in the FX markets and most of all how Sterling is trading against its peers

In the UK the inability of a cohesive Brexit plan has resulted in extreme bouts of volatility towards the lack of a Brexit deal. As there has been some developments and an extension, some of these risks have now receded and from a low base GBP should start to pick up some of the historical discount against other major currencies.

  • No hike this year, and the policy path is heavily dependent on Brexit.

  • Risks of a no-deal Brexit have receded. Both major parties now support some sort of deal.

  • Still potential general election this year, but we have become more optimistic after the latest breakthroughs between the US and EU; there is now a roadmap toward a deal.

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