Tuesday, 28 June 2016

Calling a bottom on Sterling? Might be too early

Written by Hussein Sayed, Chief Market Strategist at FXTM

It might look very attractive to buy a major currency which has fallen by more than 11% in two trading days and currently standing at lowest levels in more than three decades. However, it might not be the sterling case.

Two days of weekend break after the announcement of U.K.’s vote to leave the European Union were not enough to reverse markets selloff.  George Osborne who also aimed to calm markets in his first public appearance since the referendum stating that “U.K.’s economy is about as strong as it could be to confront the challenge the country now faces”, but unfortunately this didn’t work out too.

In fact, we appear to be in a totally different world now as we face the most complex divorce ever, and it will take time understand all the complications of the breakup. Here’s a snapshot of the most important developments post-Brexit vote.

•             David Cameron announced his resignation
•             Equity markets lost more than $3 trillion in two trading days, exceeding losses of the 2008 financial crisis.
•             The Pound tumbled by more than 11%, its biggest two days fall in more than three decades
•             S&P the last major rating agency to strip U.K.’s top-notch AAA rating to AA.
•             U.K.’s 10 years bond yields fell below 1% for the first time ever.
•             European banking sector lost almost quarter of its market value, with some banks trading at record lows.
•             Talks of another Scottish independence referendum, and markets guessing who's next to leave the EU.

Back to sterling, it seems there’s very little news to support the currency at the moment, and David Camerons’ proposal yesterday not to trigger Article 50 will only lead to a prolonged period of uncertainty, exposing the pound to more downside risk. I would say another 5 – 10% drop from current levels can’t be ruled out in the next couple of weeks.

The Euro doesn’t look in a much better shape. EURUSD has dropped by 3.5% from Friday’s highs and the fear of domino effect continues to be the biggest risk on the single currency. At current stage I prefer selling the rallies than buying the dips until the storm calms down. Meanwhile safe havens such as USD, Yen, and gold, albeit looking overvalued they’re likely to experience more short term inflows if Brexit path remains unclear. 

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