Rollercoaster Pound Sterling ride
After an early slide, Sterling was subjected to high volatility as reports of a potential landing zone for level playing field and fisheries issues were quickly denied by EU sources.
Sterling ended the European session with limited net losses as the pound-to-dollar rate (GBP/USD) settled around 1.2900 and the Sterling-to-Euro rate (GBP/EUR) around 1.0975. Volatility will inevitably remain elevated in the short term.
EU denies trade breakthrough, rumours will continue
After sliding early in the European session following the EU decision to launch legal action against the UK, Sterling recovered very strongly ahead of the New York open as EU relations continued to dominate trading amid high volatility.
According to media sources, a landing zone for state aid had been reached while fishing remained the last sticking point and UK officials were increasingly confident of a deal.
There were reports on Wednesday that there was scope for a compromise on fishing and reports of a potential resolution to state aid would suggest that both sides were close to securing an overall deal.
Following the source report, Sterling spiked higher with a GBP/USD peak near 1.2980 while GBP/EUR hit 1.1030.
Gains were, however, short lived as an EU source denied that there were potential landing zones for the level playing field or fisheries. Another source dismissed the report as “UK spin.”
After talks formally ended on Thursday, EU Chief Negotiator Barnier and UK counterpart Frost are due to hold a meeting on Friday with rhetoric monitored very closely.
Short-term Sterling volatility spiked to the highest level since March.
Neil Jones, head of FX sales at Mizuho commented; “If the headlines continue and we’ve got the EU/UK updates which continue to remain bullish to the pound one moment and bearish to the pound one moment – and my guess is that’s what we do have in store – volatility will be greater and the potential ranges for the pound on a daily basis will be greater as well.”
UBS commented; “As Brexit talks continue headline risk remains somewhat elevated and as such continue to advocate a more flexible stance given current information.”
According to Credit Suisse; “GBPUSD strength looks to have stalled near term and with the USD itself expected to strengthen again the immediate risk looks set to shift lower in its broader range. Support moves to 1.2805 initially, beneath which can add weight to this view for a move back to 1.2752, then the 200-day average at 1.2720.
TD Securities added; “We think the shock value of a sudden and largely-unexpected no-deal outcome could be worth as much as a 5-7% drop in cable in the immediate aftermath of the event. From current levels, for example, that would imply a spike down to the 1.19-1.22 zone.”
The bank expects a recovery in 2021, the magnitude of the bounce depending on trade terms.
Source: ExchangeRates.org.uk
