Sterling is under pressure today with the currency falling across the board in a timely reminder that despite the positive rhetoric surrounding the impending triggering of Article 50, the pound remains susceptible to further declines. The FTSE 100 is higher by more than 40 points this morning as the stock market attempts to recoup some of Monday’s substantial declines.
Downside risks remain for GBP
A quick glance at the performance of the pound in January shows monthly declines against all its major peers - barring the US dollar - and remains in a vulnerable position. The major political developments this month have been met with a positive reaction in the pound with Theresa May’s speech, during which she laid out her objectives for negotiations on the terms of the Brexit, seeing the largest intraday rally in almost a decade. However this has failed to see a sustained recovery in the value of sterling and the balance of risks for the market going forward remain very much skewed to the downside. The UK government is pushing to meet its self-imposed deadline of the end of March to trigger Article 50 and, despite the recent setback with the Supreme Court rejecting its appeal against the requirement of parliamentary approval for beginning the two year negotiating window, it seems likely this will be met. With the economy chugging along nicely since the vote last summer and showing little by the way of ill-effects there remains the possibility that any Brexit-induced slowdown has been postponed rather than avoided. Could the impending triggering of Article 50 be the catalyst for the economy to wake up to the risks involved in leaving the European Union and cause the pound to retest historic lows?
One down, two to go
This week’s economic calendar is a busy one, with the Bank of Japan (BoJ) last night concluding the first of three major central bank meetings. Expectations for any material change in monetary policy are low and the news out of Tokyo overnight failed to see much by the way of a market reaction. The BoJ raised its economic growth forecasts, but kept its policy stance unchanged with the baton now being passed across the pacific to the FOMC, which begins its own two-day meeting later today. Last time out the US rate-setting body increased the target range by 25 basis points, but expectations for another move are low heading into tomorrow’s announcement. Implied probabilities from derivatives markets suggest there is just a 13.5% chance that we get another hike, and therefore the focus may be more on the monetary policy statement for any suggestions of a move in the next meeting in March. Thursday sees the Bank of England (BoE) announce its latest policy mix and whilst there is also little expectation for an alteration, comments from Governor Carney will be keenly scrutinised in light of the recent pick-up in inflation. Some forecasts expect Mr. Carney to adopt a less dovish stance due to the rise in prices, but this appears unlikely given the imminent threat of an adverse economic reaction to the triggering of Article 50 and the Canadian’s limited tolerance to above target inflation may be extended.
Miners lead the attempted recovery
A list of the biggest gainers on the FTSE 100 this morning is dominated by mining stocks with Anotfagasta Holdings, BHP Billiton (LON:BLT) and Anglo American (LON:AAL) all currently rising by more than 2%. Financials are also joining in the move higher with Old Mutual and Standard Chartered (LON:STAN) rounding off the top 5. The strong rise in Tesco (LON:TSCO) last week has fizzled out somewhat and after yesterday’s drop, today’s 1.2% decline has seen the majority of the gains erased. The index as a whole has hit an all-time high this month but is on course to end January in the red for the year. The reversal in recent weeks has come in part due to the aforementioned rally in the pound, but also a souring of global sentiment as US president Donald Trump is proving to be even more erratic and unpredictable than many feared.