Sterling in Focus

Sterling in Focus this week

The global stocks markets and in particular the US stock markets are experiencing very high volatility to start the year off. A combination of geopolitical woes – the Ukrainian crisis and rising global interest rates are behind this volatility. This unease in the markets is filtering through in other asset classes and currencies are not immune to the unrest.

During periods of high volatility and ‘’risk-off’’ in the financial markets, Sterling historically tends to trade badly. GBP/USD will trade lower and EUR/GBP will trade higher. We are seeing this pattern emerge over the past few days as global equity markets take a tumble – from its highs in January the Nasdaq 100 has sold off over 17%. Given Sterling’s rally so far in January, this brings the Pound into focus this week and it fights several potential headwinds.

In the chart below we can see how Sterling has sold off over the past few trading sessions and is also approaching its 50 day moving average in GBP/USD.

The volatility in the financial markets is of concern for Sterling bulls as highlighted above, however, there are several Sterling centric issues also coming into play this week.

Market positioning – the pound had started 2022 with the market holding a heavy short position. We failed to make any further progress lower and these positions got squeezed out, as Sterling began to rally at the beginning of the year. This positioning has largely been washed out of the market and is no longer acting as a Sterling positive. As we approach the end of the month, the natural flow dynamics of the market have changed. Firstly the FTSE has been a stand-out performer in the global equity space in January and therefore we should see Sterling supply in the markets as Global portfolio managers rebalance their books at the end of the month. We should also see some Sterling supply as BHP Billiton removes its dual listing in the UK.

Now thrown in on top of all this, the political folly surrounding Boris Johnson in the UK and the Gray report, with a potential leadership challenge, and we could well have the perfect storm for a lower pound into month-end. Watch this space…..

From the chart below we can see how Sterling has sold off and Euro has rallied in the face of increased financial volatility – the 50 day moving average – line in pink – is now acting as technical resistance.

 

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