Sterling turnaround after Super Tuesday

After taking the top spot in the G10 currency space on Tuesday, the pound is the worst performer so far today. After the rapturous reception to Theresa May’s speech, today sterling traders may be taking a finer look at the detail, and concerns may start to arise about Theresa May’s tough line on Europe, saying that she would prefer no deal, rather than a bad deal with the EU after Brexit.  This is a key reminder that the pound’s sensitivity to politics is alive and well, and volatility is here to stay.

But, yesterday’s price action does give us some important information about the pound that could help to determine just how low it will go versus the dollar in the coming months. More than 60% of the pound’s gain versus the dollar on Tuesday occurred during and after Theresa May’s speech, with the other 30% occurring ahead of the speech.

GBP still susceptible to Brexit uncertainty

This analysis is significant, as it suggests that the Prime Minister’s comments about how the UK will leave the EU and the single market, were well-received by GBP traders, particularly May’s confirmation that Parliament will debate the final Brexit deal. This could limit further declines and prevent GBP/USD from breaking below 1.20 in the near term.

It’s worth remembering that sterling appreciation ahead of May’s speech on Tuesday can be partly attributed to Donald Trump’s comments that appeared to talk down the dollar. This caused a wide spread dollar decline on Tuesday, with 8 of the G10 currencies appreciating more than 1% vs. the greenback. This is a rare event in itself, and although the pound’s performance was impressive, it was given a helping hand by a wilting dollar.

Trump and the dollar

With only 48 hours to go before President elect Trump takes office, the Trumpflation trade is under the spotlight. If Trump continues to stress the negative economic impact from a strong buck, then we could see a breakdown in the strong dollar – strong US equities –  rising bond yield trade that we have seen since his election win back in November. Watch out for our inauguration special, which will take a look at the “Trump trade” in more detail.

If the strong dollar gets a dressing down by Trump in the future this could have big ramifications for the FX market. Firstly, it could protect the pound against a more severe decline once Article 50 is triggered in three months’ time. Secondly it could cause a spike in FX volatility that may trigger a wave of risk aversion in other markets.  Looking ahead, Trump could be the biggest risk factor for financial markets this quarter.

Stock markets vulnerable to end of Trumpflation trade

Stock markets are slightly higher in Europe, the FTSE 100 has maintained its inverse correlation with the pound, and is clawing back some of yesterday’s losses as sterling retreats. Interestingly, the worst sectors in the FTSE 100 include financials, materials and industrials, which were sectors that did well during the “Trumpflation” trade.

Ahead today, UK labour market data is worth watching, even though labour data is a lagging indicator, a strong reading, particularly for wages, could limit GBP losses, as it would add to inflation pressure and the threat of an earlier than expected rate hike from the BOE. We also have US CPI data that could give the dollar a boost if it beats expectations.