The Daily Update - A Spike So Unlikely It Could Happen

According to the latest Bloomberg survey the UK economy shrank in the second quarter by 0.1% as the retail industry reported a further fall in sales. The British Retail Consortium reported sales dropped 1.6% in June from a year earlier and follows on from the June Purchasing Managers Indexes which had a contraction in both manufacturing and construction. Within manufacturing the production and new business element showed the worst reading in almost seven years following on from the high levels of stock building in the first quarter as companies rushed in to build inventories ahead of the original March 29th Brexit date.

Only last week Bank of England Governor Mark Carney warned that global trade tensions and the threat of a no deal Brexit had increased the downside risks to the economic outlook. Indeed the market has almost fully priced in a cut in rates from the BoE by the middle of next year and few economists expect a rate rise until the second quarter of 2021 at the earliest. Carney also warned that the BoE response would depend on the impact on supply, demand and the exchange rate.

The pound is currently trading at the lows for this year against the US dollar, down over 2%, one of the worst performers over July thus far falling 1.3%. Against the Euro, the pound has given back all the gains from the first quarter and is down around 5% since early May.

So what can stop the pound falling further? There are a number of items we should consider, such as a Brexit deal which the market has moved away from considering, also the BoE, as suggested by the governor will respond to the exchange rate. The main item is that Commodity Futures Trading Commission (CFTC) data shows that leveraged funds have raised their short pound positions to the highest level since September last year.

Although it is hard to see the pound having a sustained rally and the future outlook by most is for weakness; in currencies when all the market faces the same way the opposite is extremely likely; suggest players watch out for a short covering induced spike on any information not as bad as the market currently has priced in.

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