A solid rebound for the British pound is the talk of foreign exchange markets on June the 7th, but beware, the strength is ultimately hollow.
At he time of writing:
- The pound to euro exchange rate is trading at 1.2820
- The pound to dollar exchange rate is trading at 1.4555
- The euro to pound sterling exchange rate is tading at 0.7801
The issue of the EU referendum continues to the key concern for the UK currency, and will likely remain so for the next three weeks.
Today's price action in the pound to dollar exchange rate has even been spiced up by a 'fat finger' incident in Asian trade, a mistake that saw sterling rocket by over 200 points against the dollar. The move also saw the pound to euro exchange rate (GBP/EUR) rocket noticeably.
Volatility is heightened with corporates and investors alike creating massive volatility in options markets as they seek to take out hedges against any potential negative moves should the UK vote to Leave Europe.
Sterling has found some relief with the most recent poll results from YouGov showed 43% of respondents wanted to stay in the EU versus 42% who wanted a Brexit.
Coming as it did, after two polls showing a lead of over 4.0% for the 'Leave' camp, the sudden recovery in the 'Remain' share of the vote surprised some investors who had been concerned Brexit might widen its lead.
As it stands it looks very likely to be close fought race with a collation of poll results showing remain now stand on 51% and Leave at 49%.
Sterling rose over 1.0% higher against the already punch-drunk dollar, rising over a cent and a half to the pound,from 1.4440s to the 1.4590s.
The pound also reversed its recent declines against the euro, sinking a penny per euro from 0.7860 to 0.7755 at the time of writing.
ING Bank's Petr Krpata highlights the impending debate between Nigel Farage and the Prime Minister David Cameron on TV tonight as a major event on the horizon for the pound:
"The focus of the day turns to the PM Cameron’s (Stay camp) debate with Nigel Farage (Leave camp) on ITV tonight."
He also notes how activity in the options market has reached fever pitch, after implied volatilities "skyrocketed" in EUR/GBP evidencing current market uncertainty. This means investors see big price swings ahead (not surprisingly) and are probably hedging in higher numbers in case. This was probably caused by the surprise increase in the 'Leave' vote at the start of the week.
Price action versus the dollar has been complicated by the low Non-Farm Payrolls reading last Friday, which showed the economy only added 38k new jobs in may, as opposed to the 160k the markets had been expecting.
The well-below-par result led to a complete review of when the Federal Reserve (Fed) was expected to increase interest rates. Prior to the release markets had been indicating a 40% probability of a June rate rise, however, that fell o just 4% post-NFP.
Janet Yellen's speech yesterday was somewhat upbeat and temporarily led to dollar-strength, however, all the gains were soon given back as she made no indication of when the Fed would increase rates, although she did retain the phrase that a hike would be appropriate in coming months.
Nevertheless, much will depend on future NFP data and if it stabilizes or continues to show weakness in the job market. This has weakened the dollar , unfortunately, which is likely to remain on the back-foot until the next NFP in July, helps decide whether May was just a blip or something more systemic.
Euro to Pound: How Much Higher?
As far as technicals go, the EUR/GBP chart showed a dramatic pull-back after breaking out higher above a major trend-line earlier in the week.
This morning, however, it fell back down to support at the level of the trend-line again at 0.7757.
This could be just a 'return move' which often follows breakouts higher, and is just a step back before the pair goes up again. As such we maintain our 0.8000 target for now assuming support holds and the pair rises higher.
A break above the current 0.7910 highs would confirm the continuation higher.
The fact the poll result wich caused the pull-back only showed a 1.0% lead for 'Remain' makes us think the gains may not hold.
Lloyds Commercial banking's Robin Wilkins is also construtive about the pair, as he still sees the longer-term trend as bullish, and likely to resume:
"Our focus remains on the 0.7920/40 region. A move up through this resistance area would suggest the declines from 0.8117 to 0.7610 have merely been another correction phase and risks a re-test of the 0.8200 region."
Commerzbank's Karen Jones's is a little more bearish, advocating holding "little shorts", she sees a break below 0.7736 as opening the way south (today's lows are at 0.7754.
She also sees a sign of exhaustion on th 240min chart after the Demark indicator completed a "13 Count" which signal exhaustion of the up-trend:
"EUR/GBP has seen rejection at tough resistance at .7905(61.8% retracement) and .7945 the high from the beginning of May. We note the 13 count on the 240 minute chart and while this suggests initial failure, the market will need to go sub .7736 (26th April low) to alleviate upside pressure."
Pound Steals the Headlines on "Fat Finger" Surge
Sterling grabbed headlines once again, this time with a massive near 200 point whipsaw up and down move in late Asian trade.
There was nothing really to blame the jackknife price action and most traders were happy to attribute it to a fat finger trade - essentially someone made a mistake.
The below snapshot of GBP/EUR shows the timing of the mistake and confirm the move spilt into other GBP pairs:
The move has only heightened the sense of 'danger' that the British pound now presents, and we would urge those with impending GBP payments to ensure they have a solid risk managment strategy in place.
A Brief History of Fat Finger Disasters
Somewhere, someone probably lost their job today thanks to the so called fat finger trade. A fat finger trade is nothing but a mistake.
Here are some of the more famous fat finger trades of recent years:
- In 2006, a fat-finger error by a trader at Mizuho Securities in Japan caused the firm to short sell a stock in an error that cost the firm 40 billion Yen to unwind.
- In 2014, a Japanese broker erroneously placed orders for more than US$600bn (£370bn) of stock in leading Japanese companies, including Nomura, Toyota Motors and Honda which was subsequently cancelled. If the order had been fulfilled it would have exceeded the value of the economy of Sweden.
- In 2015, a junior employee at Deutsche Bank whose superior was on vacation confused gross and net amounts while processing a trade, causing a payment to a US hedge fund of $6bn, orders of magnitude higher than the correct amount. The bank reported the error to the British Financial Conduct Authority, the European Central Bank and the US Federal Reserve Bank, and retrieved the money on the following day.