Sterling’s recent weakness points to opportunity

Opinion piece: Luke Walden, FX Specialist, Godi Financial

 

Sterling has slumped considerably throughout the summer months, especially against the rejuvenated Euro. Since Prime Minister Theresa May triggered Article 50 and the official commencement of the Brexit negotiations at the end of March 2017, Sterling has, from the highs set in April 2017, depreciated by around 10% against the Euro.

 

Such recent apathy for the Pound has added further woes to UK importers who are experiencing higher costs for products and services from the Eurozone. Holiday makers are also becoming aware of market moves as suddenly many bureau de change outlets at UK airports aren’t even willing to part with one Euro for each of their hard-earned pound coins.

 

Unfortunately, many analysts feel that until Brexit negotiations become more transparent, and hopefully more definitive, there is a lack of reason and purpose to invest in Sterling. That said, I can’t help but think there is value in Sterling around these levels versus the Euro. Parity (£1:€1) is a huge psychological level that I feel will ward off further weakening of the Pound.

 

A 10% movement over 4.5 months is a large swing by anyone’s standards and I can’t help but think it’s been overdone to the downside. UK export businesses may be wise to look in securing rates around these levels to protect themselves from any large short-term recovery in Sterling. None of us have a crystal ball of course, but it may be a decent risk-reward play right now.

 

Conversely, Sterling has appreciated against the US Dollar over a similar time period. Trying to second guess the USD at the moment is hard work. With President Trump’s relentless controversial standpoints, similar to the Brexit effect on Sterling, it’s hard to see why the Greenback would be an attractive proposition at the moment. Indeed, as I type, Sterling is almost trading back up to 1.3200 against the Dollar, levels not seen (prior to August) since September 2016.

 

ING currency strategist, Viraj Patel, recently stated that he feels with the ongoing uncertainty surrounding Sterling and the Dollar, the Euro seems to be the currency of choice for investors and traders alike. That does of course make sense. But let’s not forget; the Eurozone is far from out of the woods. Prior to Brexit, chatter was constantly heard surrounding the Italian banking crisis and Greece amongst other factors. These issues haven’t simply disappeared. And how will Brexit affect the Euro region? That is also an unknown quantity.

 

I can’t get as excited about the Euro as others may right now and I feel there is a turn in fortunes to come which may see GBP-EUR climb back up to the dizzy heights of 1.15-1.20 before too long.

 

The GBP/USD conundrum continues and it’s one I’m finding hard to call.  I suspect we’ll continue to see the continuation of the Dollar weakness trend. I’ll be sure to keep a close eye on Donald Trump’s Twitter account for more direction on that front.

 

Where next?

To contact Luke Walden email luke.j.walden@godi.io or call 0203 326 9082

 

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