Financial Markets Showing Signs of Increased Stress

Financial Markets Showing Signs of Increased Stress;

Having sold off significantly into mid-May, global equity markets had begun to see a rebound up until Friday. We could add most risk markets to the above sentence, as the financial markets, in general, began to settle down and adjust to this new environment of higher inflation and global central banks that are hiking interest rates across the board. Friday’s higher-than-expected inflation printout of the US has seen this all turn around quite dramatically, with volatility creeping back into the stock markets, bond markets, currency markets and crypto space.  Friday and Monday have seen unprecedented sell-offs, with the Dollar gaining in strength as fear once again grips the financial markets.

Sterling – hit by a strengthening Dollar and political uncertainty.

Sterling has had the misfortune of facing a double whammy over the past 2 trading sessions versus both the Dollar and Euro – GBP/USD has sold off and EUR/GBP has rallied. As fear grips the markets, the Dollar has strengthened as we see the traditional flight to quality. This Dollar strength has been further compounded when it comes to GBP/USD as we face the uncertainty of the UK bill to override certain sections of the Northern Ireland Protocol – as announced yesterday evening by Foreign Secretary Truss – we will have to wait and see the full extent of the EU’s response – a full out trade war is of course still on the table.

Cable – GBP/USD has sold off aggressively over the past 48 hrs – see chart below – well over 3.5% and below the lows seen on 8th May at 1.2156. 1.2139 was the low yesterday.

This recent sell-off in GBP/USD has brought the all-important 1.20 level into play. This is a major level of support dating back to the Brexit vote in the summer of 2016. Given the price action down at these levels over the past few years, we would expect to see longer-term buyers of Sterling to enter the market at any first attempt of this support, however a clean break and weekly close below the level would be worrying – pls see chart below.

The long-term chart of GBP/USD – dating back to the Brexit vote – red line indicating long-term support at the 1.20 level.

Despite EUR/USD selling off, the Euro has actually rallied versus Sterling and is right up against the all-important 0.86 resistance zone on the topside in EUR/GBP terms – 1.1628 in GBP/EUR terms. We have pointed out this level now on many occasions and we feel if the situation with the North Ireland Protocol was to deteriorate further, mainly led by retaliation from the EU,  we would look for a significant break of the 0.86 level – which opens us the 0.88 level in EUR/GBP above.

EUR/GBP – the all-important resistance zone at 0.8600 –

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