The beginning of the year so far has seen further weakness for sterling compared to the gains it made in the last quarter of 2019. During the first 13 days of January alone, sterling has dropped nearly 1.6% versus the US dollar from 1.3254 to its current level, mid -1.30. Similarly, the pound-euro level of exchange has dropped nearly 0.75% from 1.1813 to 1.1726.
Britain’s sterling is largely ignoring economical data as investors are being put under pressure from the uncertainty of Brexit, which justifies December’s 2% soar after the announcement of the result of the general election as well as the current decline. However, a recent Reuters poll of nearly 60 foreign exchange strategists, taken last week, showed that the pound could be back up to levels of 1.32 versus the dollar at the end of January and may have risen to 1.35 by the end of the calendar year.
“Knee-jerk moves and profit-taking aside, the trend in 2020 remains for a drift higher in GBP/USD in our view and we look to renew our GBP long bias,” said Jordan Rochester at Nomura.
Last week, the commons voted in favour of the Withdrawal Agreement Bill, achieving a confident total of 330 votes for and 231 against. The bill will now pass to the House of Lords for further scrutiny this week in hope to pass the bill through the parliament before the Brexit deadline which is now only 18 days away; further volatility for the sterling is therefore likely in the upcoming weeks.
Last week the US dollar edged lower versus the safe haven Swiss franc and Japanese yen as the possibility of renewed US-Iran sanctions weighed on market sentiment.
Since then, both the yen and franc have fallen as the United States and Iran are moving away from an all-out conflict. Nevertheless, the greenback is also under current pressure from weaker than expected non-farm payroll figures from last month which fell 19,000 short of expectations.
The Australian dollar is expected to face economic pressure as bushfires continue to torch the continent, leaving a likely bill in billions as well as damage to spending, sentiment and most importantly tourism, which currently accounts to 3% of the Aussie economy. As the result, the Reserve Bank of Australia (RBA) is under more pressure to cut the interest rates further to stimulate the already sluggish economy.
“The fires are definitely an additional weight on the economy, and should lower the barriers for an RBA rate cut,” said Terence Wu, a strategist at OCBC Bank in Singapore.
“(The fires) certainly play into the view that the RBA is, at the margin, going to be more inclined to cut rates than they otherwise might be,” said National Australia Bank’s head of FX strategy, Ray Attrill, who expects a cut in February.
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