While the ‘Trumpettes’ literally sound out as we hit the magical 20,000 mark on the Dow together with all-time highs for the S&P 500, sterling's performance has caught our eye.
We knew politics -- specifically, Brexit -- would be volatile, but the recent move has been significant. On Wednesday, we reached 6-week highs in cable, a level last seen on December 14 when the Fed hiked rates for the second time in the cycle. Sterling in absolute terms is up 4.5% from its lows last week versus the greenback -- or close to 600 pips -- and 3% against the Euro. This performance has taken place in just 8 trading days.
Clearing huge uncertainty around Brexit was key in determining whether prices in cable would break through the psychological 1.20 area. In that light, PM May’s speech last week has really decided the near-term market structure for the pound as we appear to have now built a solid base. Tuesday’s Supreme Court ruling was also brushed aside, showing sterling's current resilience.
We identified a classic chart pattern – the ABCD pattern – earlier in the week, which shows perfect harmony between price and time. Should this harmonic move complete its expected course, we should then get to the 1.2750 resistance zone. This is even more likely if we get positive UK GDP on Thursday or if President Trump signals a strong bilateral trade deal on Friday.
The UK is now firmly on the hard Brexit path, which has been far from certain since June’s referendum. We note that near-term political volatility may pick up with opposition-party amendments. However, in the medium term, we think Trumpflation may well excite market participants once again and send sterling lower. European politicians and their electioneering will also sound louder soon.
