The Sterling Reversal

Although the phrase feels tired and worn, there is a definite ‘risk-on’ tone to markets at present, prevalent in both FX markets and beyond. This can be seen in the continued march higher of the Aussie, equities and also sterling, which has found it impossible not to join in, despite the bearish undertone that has been evident for most of the year as the EU referendum in June looms ever larger. The yen has been the interesting one. Normally we’d see this weaken in such a ‘risk-on’ phase to markets. Yes, it has been underperforming vs. most other major currencies, but the reversal higher in USDJPY has been minimal. This suggests that the forces pushing the yen higher are still at play, as frustrating as this must be for the Japanese authorities.

For sterling the change in tone is pertinent, given that it was the weakest major currency during the first quarter. It harks back to the old adage that nothing moves in a straight line forever in FX. You only have to look at the Brazilian real this year to know that. Whilst cable has shown a decent turn-around against the dollar, the move against the euro has been more modest, taking it to levels last seen 3 weeks ago. Note that BoE Governor Mark Carney appears in the UK parliament later today, so we could see some further comments on the wires with regards to Brexit, but the Bank has probably said all it wants to say on the matter, especially as the campaign has now officially started. Elsewhere for today, the agenda is fairly light, with just German ZEW data released at 09:00 GMT. Note that the overall positive tone to risk has allowed oil to recover all of the losses seen in the wake of the weekend Doha developments.

Did you know?

U.S. President Richard Nixon is credited with enabling a free-floating currency system after ending the Bretton Woods Accord.

Word of the day
"Coincident Indicator" - An economic indicator that shows the current state of the economy of a particular area. The GDP, for example, is one of the most significant coincident indicators.
Pro Tip

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