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19th October - Can Sterling Euro hit par

23 October 2017




The structure is clear: having broken out of the bear channel the market has some bull impetus that may take it to the band of Prior Highs 0.9412- 0.9803 – so, close to parity.

But there is no compelling long-term pattern driving that move – yet..

Is there a shorter-term bear pattern for Sterling?


The double failure at 0.9306-0.9365 was sufficient to send the market down to the support from the Prior High at 0.88.

There has been a bounce.

But as yet there is no short-term pattern suggesting very much stronger Euro and a weaker Sterling.


The Pound’s value against the Euro; Sterling/Euro, has become a barometer for BREXIT negotiations.

Since the referendum the Pound has suffered a serious devaluation against the other major currencies, especially the Euro, but has the Pound’s weakness run its course or could it weaken further?

To make any sort of judgement it is important to analyse the “BREXIT” negotiations and the potential outcomes.

The UK government hopes for an orderly exit from the EU with a two year transition period followed by a comprehensive free trade agreement that gives the EU access to our market and ours to theirs in a way that is as close as possible to current arrangements, but negotiations have become bogged down by the so called ‘Divorce’ bill.

If the two sides fail to find enough common ground over what is a fair and reasonable payment for the UK to make to the EU in respect of liabilities it entered into while a member, the EU will not engage in talks about either a transition period or a trade deal.

The result would mean the UK would have to fall back on WTO trade tariffs which are less advantageous than its current membership of the EU single market. And although the UK intends to negotiate new free trade deals with other non-EU countries, these cannot be agreed while the UK remains an EU member and even when the UK has exited will take several years to agree.

 If the UK manages to reach an accord with the EU and agrees a transition period and negotiates a free trade deal where all are seamless, the Pound will probably recover a good deal of its losses. That is because the damage done to the UK economy and specifically the City of London will be minimal, as companies would be handed a playing field they are familiar with, allowing business as usual.

On the other hand, if no deals are agreed and WTO tariffs become the fall back position, some businesses from the City of London and some manufacturing businesses will relocate to the EU causing a loss of key jobs and further harming economic activity. Clearly the impact on Sterling would be very negative.

And although in time the economy would probably recover as new trade deals were negotiated the short/medium term would prove very uncomfortable indeed. For currency markets traders are mainly short-term focussed, meaning a so-called ‘hard’ BREXIT would see Sterling sell off against the Euro as inward investment dried up and the UK’s Sovereign credit rating was down graded further.

But until we reach March 2019, the process is in a constant state of flux. Traders are reacting to the latest news leak. As the deadline draws nearer traders will begin to form an opinion about the most likely outcome. If it is to be a ‘hard’ BREXIT they will sell the Pound.

Given the current log-jam in the negotiations a ‘Hard’ BREXIT is becoming increasingly likely. The EU wants the UK to agree a financial settlement without it knowing what benefits to expect from a new trade agreement. UK government’s stance is that nothing is agreed until everything is agreed. So the two sides look poles apart. If a compromise cannot soon be found we expect Sterling to renew its slide against the Euro towards parity.


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14th October - the Nikkei's strength is set to continue

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