Historical Pound Drop and Unexpected Stock Rise

The U.S. Dollar shows growth for the seventh trading session in a row, once again updating 27-month highs. The Dollar index reached 99.2, adding 0.3% from the beginning of the day.
Alexander Kuptsikevich
British pounds banknotes background

In addition to trade disputes, which are the main driving force, the dollar index is also growing due to the weakening of European currencies after the publication of weak data.

The British pound returned to the area of 34-year lows at 1.2030, declining for the fifth trading session in a row, following the latest wave of no-deal Brexit fears. Later on Tuesday, there will be a vote on early elections and the possibility of blocking any exit from the EU without a deal. The chances of such an outcome are low, as the ruling party has the majority of votes. This has led to pressure from the markets, which are extremely negative about the consequences of a no-deal scenario. Based on this logic, the pound will have a hard time if the above initiatives fail.

However, it is worth looking at the situation from a different angle. Traders avoid uncertainty, and the fact that there are no other options reduces the range of uncertainty. In this case, the initial reaction of the market may be followed by the recovery of the British currency. Sterling showed a similar reaction in 2017, finding the bottom near 1.20 USD – approximately the same as now.

The stock market reaction is also notable. The FTSE 100 index added 3.1% during the last five trading sessions, while GBPUSD declined by 2.1%. This is circumstantial evidence that stock market buyers view the current British currency exchange rate as low enough to support the competitiveness of British companies, despite fears about the consequences of a disorderly break with the EU.

Similarly, the euro and the European stock market show different signals. While EURUSD has been breaking new lows since May 2017, declining to 1.0935, the German stock index DAX is rebounding after a recent decline. The Euro has lost 1.3% against the dollar in the last four trading sessions, and German stocks have grown by 2.7% during the same period.

Purchases of German equities intensified just as the euro declined to its lowest level in August, marking a shift from consolidation to decline. This may well be a signal that stock markets are positively assessing the weakening of the euro and pound as a measure to boost economic growth, despite the signals we have been receiving in recent days.

This article was written by FxPro

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.