The pound soared in early European trade today hitting a high of 1.2673 before finally succumbing to some profit taking by mid-morning London dealing. The move was partly driven by EURGBP flows which hit a multi month low of 8566 before rebounding above the 8600 level but the underlying strength in cable had more to do with the Trump trade than anything else.
Ever since Donald Trump’s surprising win on Tuesday, cable has shown relative strength holding up well against the buck while euro lost four big figures since Tuesday’s highs. The flow into cable can be attributed to the stall of progress on Brexit as the case weaves its way through UK courts but also the election of Mr. Trump.
One of the seminal threats against the UK economy as a result of Brexit was the promise by President Obama not to negotiate a bi-lateral trade deal. That policy will change completely under President Trump. Not only that but Mr. Trump is very likely to force the EU to negotiate with UK on PM May’s terms or threaten a cooling of trade ties between EU and US. In short having Mr. Trump as President may have ameliorated some of the worst economic aspects of Brexit and the market is reacting to this development by relentlessly bidding cable.
The pair now approaching strong resistance levels at 1.2700 and may run into some profit taking in the near term, but the dynamics in the trade have changed and it has now become a strictly buy the dip affair with 1.2500 now becoming strong support and 1.3000 the key long term target of the bulls.