Saturday 1 October 2016

Daily Market Update: Sterling: resilient but still vulnerable

Simon Barry

Published 20/04/2016 | 09:34

The return of two-way price action in sterling shouldn’t come as a major surprise. Photo: Reuters
The return of two-way price action in sterling shouldn’t come as a major surprise. Photo: Reuters

A continuation of the two-month rally in US stocks saw the S&P make a new closing high for the year last night, surpassing the 2,100 mark for the first time since early December. 

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This brings its cumulative gains from its February low to over 16% as the market has left the bout of early-year weakness and volatility in the rear-view mirror, helped of course by the more dovish soundings from the Fed of late.  The gains on Wall Street followed on from a very positive session in Europe which saw the Euro Stoxx 50 push ahead by 1.6% to take its rally from February to a US-equalling 16%. 

Price action overnight in Asia has been mixed: Japanese stocks are up slightly, but the Shanghai Composite is down about 2.5% reflecting renewed caution about the Chinese economy. Oil prices are also lower, with Brent crude opening at $43pb, down from a high yesterday of $44.50 as Kuwait oil industry workers said they would end a strike that disrupted output in what is OPEC’s fourth-largest producer for three days. 

The major currency pairs are little changed on net over the past 24 hours, with the dollar a touch weaker having declined by about 0.2% against both the euro and the pound to open at $1.1355 and $1.4365 respectively.  More generally, sterling resilience remains a notable theme.  Eur/Stg traded briefly at a three-week low below 78.9p yesterday as sterling continued its mini-rally from the near 81.2p level two weeks ago. 

The return of two-way price action in sterling shouldn’t come as a major surprise given how far and how fast the UK unit had fallen reflecting escalating market concerns about Brexit.  And do we think that there is scope for a meaningful rally for the pound in the event that the UK votes to remain in the EU (or that polls suggest such an outcome is increasingly likely) – the outcome that is our central expectation..? Yes, we do. However, we struggle to believe in the durability of a sustained rally in sterling from here at this point in time given the Brexit overhang which in our view continues to represent an important source of potential downside risk for the pound in the weeks ahead.

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