Market analysis: Pound slides on dollar’s strength

Markets will take US president-elect Donald Trump’s state of the nation speech on January 20 as an opportunity to look deeper into his fiscal and monetary policies.

Theresa May, the UK’s prime minister, told The Sunday Times she is committed to a strong, clean Brexit. Facundo Arrizabalaga / EPA

Currencies and commodities opened lower against the US dollar this week as an old theme re-emerged and shook risk sentiment, sending the pound lower and the US Dollar Index higher.

In an interview published in The Sunday Times, Theresa May, the British prime minister, reiterated her commitment to a strong, clean Brexit. The pound opened at a 200-point lower gap at 1.19948, its lowest level since the flash crash in October as markets digested Mrs May's commitment to invoking Article 50.

The volatility and bearish sentiment are expected to persist this month. The prime minister is expected to give further details about her Brexit plans when she addresses the country today.

The pound is being so driven by investor sentiment that even an improving UK data docket cannot seem to reverse the current negative sentiment. We have seen a consistently stronger run of figures across the board. However, the lag effect of this vote will catch up through the middle and end of this quarter and should lead to waning growth across the UK. In the interim, we maintain our long-running bearish stance on the pound with a downside test of 1.18 expected in the weeks ahead.

The lower gap in the pound supported the dollar, with the US Dollar Index bouncing off one-month lows. The US Dollar Index will continue to consolidate in the range between 100.70 and 104.00 through the month with some heightened levels of volatility as US president-elect Donald Trump addresses the nation as he takes office on Friday.

Markets will take Mr Trump’s speech as an opportunity to look deeper into his fiscal and monetary policies. They were left disappointed last week during his first press conference with the media since winning the election when he failed to address any economic issues – and the reversal in risk sentiment led a dollar sell-off rather aggressively as a result. It will be premature to know the route of his speech with regard to economic policy – but expect volatility to remain elevated.

Mr Trump’s speech will be preceded on Thursday by the Euro­pean Central Bank’s rate policy meeting in which no changes are expected from Mario Draghi, the bank’s president.

The Dubai Gold & Commodity Exchange’s (DGCX) euro contract has consolidated between 104.00 and 107.00 and we do not expect to see a strong test of ­either end of this channel through the end of January.

DGCX’s West Texas Intermediary crud e contract has also consolidated and seems to have found its footing between $50.50 and $54 per barrel. There have been many comments emerging from various Opec members with regards to the proposed cuts. Saudi Arabia has led the way by committing to reduce daily production to less than 10 million barrels per day, which would equate to a cut of about 500,000 bpd. Crude markets will continue to take cues from such comments and we maintain our view that crude will continue to trade in this range with a slight bullish bias.

Gaurav Kashyap is a forex trader based in Dubai.

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