Sterling At Two-Month High
In the event of no-deal Brexit, we could see parity for Sterling against the dollar but that risk has faded to a larger extent after a significant change in stance from European lawmakers yesterday. The Sterling dollar pair touched its highest point today since 15th July. The currency made a high of 1.2582 today and it is down only -1.37 percent year to date or in other words, it has rallied more than 5% from this year’s low.
European Commission’ President Jean Claude Juncker said that a deal can be done with the UK without the backstop and the UK can leave the EU without this provision, but only if the British Prime Minister, Borish Johnson provides an adequate alternative. Clearly, the credit goes to Mr. Johnson because the previous Prime Minister failed to move the needle to this extent.
The current development has created enormous optimism among Sterling bulls today. It is highly likely that the currency can top the level of 1.26 against the dollar. Overall, it is safe to say that the momentum is strong for Sterling and the current change in the EU narrative has opened the door for a major rally. In terms of weekly percentage gain, the Sterling-dollar pair had the best weekly gain last week since May 2019, and this week’s gain is simply a cherry on top.
How Far Can Sterling Move During October?
The good news for speculators is that there is a lot of room on both up and downside as we continue to learn more developments on Brexit. If we continue to see a strong possibility of a deal happening with the EU, it will be a no brainer for Sterling to cross well about the level of 1.35 against the dollar during this month.
On the other side, if no-deal Brexit becomes a reality, then bears will come back with a vengeance. This is where the conversation of parity becomes intriguing.
What About FTSE 100?
There is always a question of what does this strength in Sterling means for the FTSE 100 index. Historically speaking, there is a strong correlation between Sterling and the FTSE 100 index as shown in the chart below. Simply put, this means that strong Sterling brings weakness for the FTSE 100 index. However, this time this isn’t all that simple, this is because if we see a possible deal with the EU, this would mean more trading opportunities and a bigger market. Traders would consider that as an opportunity rather than a risk. This could push the FTSE 100 index higher and the current negative correlation would become positive between the FTSE 100 and Sterling.