CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open account
☰
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Open account
✖

One chart that explains the pound s decline

Article By: ,  Financial Analyst
January 16, 2017 3:36 PM

While Theresa May’s speech is hogging the limelight and being blamed for the sharp decline in the pound at the start of this week, it is worth remembering other factors are also keeping the pressure on sterling.

While we wholly concur that the realities of a hard Brexit may not yet be priced in by the market, and that further downside for the pound could hinge on what Theresa May says on Tuesday, this political noise is not the only thing that pound watchers need to be aware of. From a volatility perspective politics is king, however the fundamentals for the pound are also eroding support for the currency.

Don’t forget about inflation

Tomorrow also sees the release of UK inflation data for December. This is worth watching as rising prices could also undermine the pound in the long term. The market is expecting an uptick in the annual rate of inflation to 1.4% from 1.2%. The core rate of inflation, which strips out energy and food prices, is expected to remain steady at 1.4%. However, an upside surprise in the core rate of inflation could have a more damaging impact on the pound in the longer term, compared to May’s speech.

Why real yields matter for pound bears

It’s time to sit up and take notice of real yields, which are also working against the pound these days. Real yields are government bond yields adjusted for core inflation. So when inflation rises, real yields decline. The chart below shows 10-year real yields for the UK (white line), the US (orange line) and Germany (yellow line).

As you can see, the US has the highest real yield, which is underpinning the dollar rally. In contrast, the UK’s real yield is below zero, and if we get a larger than expected reading of core inflation on Tuesday, then we could see a move deeper into negative territory for real yields, which is likely to further weigh on the pound. While Germany’s real yield is by far the worst at -1.38%, it has been improving of late, while the pound’s real yield has declined, which is another reason to ditch the pound in favour of another G10 currency.

A negative outcome from May’s speech combined with rising inflation on Tuesday could be the perfect storm for GBP, and could send the currency below the flash crash lows from September at 1.1840 (according to Bloomberg prices).

Chart 1:

Source: City Index and Bloomberg

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.

© City Index 2024