Sterling Rallies Above 1.30, Can it Hold?

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Updated: Aug 30, 2018, 08:46 UTC

Sterling traders were caught by surprise on Wednesday after the EU’s Chief Brexit negotiator Michel Barnier said, “We are prepared to offer a partnership with Britain such as has never been with any other third country.”

Sterling Rallies Above 1.30, Can it Hold?

Sterling traders were caught by surprise on Wednesday after the EU’s Chief Brexit negotiator Michel Barnier said, “We are prepared to offer a partnership with Britain such as has never been with any other third country.” His statement comes after the risk of a hard Brexit, or no-deal Brexit grew significantly over the past few weeks. The Pound rallied sharply on the news, gaining 149 pips against the dollar.

Many investors would be wondering whether Barniers’ statement could be a turning point for the Pound. Although many issues related to trade and the Irish border are far from being resolved, it currently seems that negotiations may begin moving in the right direction. If positive news flows continue when Brexit Secretary Dominic Raab heads back to Brussels on Friday to resume talks, GBPUSD may quickly return to July highs that were above 1.33. However, expect volatility to surge in the coming weeks as we get closer to the Brexit deadline.

Positive news was also flowing from the U.S. leading to new record highs in the S&P 500 and the Nasdaq. President Trump is optimistic that Canada will join Mexico’s and the U.S.’ trade agreement. Canadian Prime Minister Justin Trudeau also shared Trump’s optimism indicating there’s a possibility a trade deal that includes Canada could be reached by Friday. With U.S. midterm elections about two months away, I believe Trump wants to strike deals, not just with Mexico and Canada, but probably the European Union too. This should continue fueling the rally in equities at least in the short run given that economic fundamentals and earnings remain robust.

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In Australia and New Zealand, the situation is looking gloomier. AUDUSD fell 0.4% on Wednesday after Westpac, one of the largest nation’s banks raised mortgage rates by 14 basis points as funding costs increased. This move may lead to further delaying an interest rate hike by the Reserve Bank of Australia as more banks are likely to follow Westpac’s actions leading to lower disposable incomes for consumers already struggling with low wage growth. The currency lost another 0.4% today after capital expenditures unexpectedly fell 2.5% in Q2 which will become increasingly worrying if such a trend continues.

The New Zealand dollar is the worst major performing currency today. NZDUSD fell almost 1% in the Asian trading session after business confidence fell to -50.3% in August, a level not seen since April 2008. These figures are likely to be reflected in lower GDP growth for Q3 and lowering interest rates may be taken into consideration. Thus, expect to see further declines in the currency until economic data starts pointing north again.

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