Pound slumps to lowest level since 1985

Summary:

• GBPUSD breaches lows beneath $1.20

• Brexit focus increases as parliament returns

• UK construction data supports slowdown in manufacturing

There’s been more selling seen in sterling this morning with the GBP/USD rate dropping below the January 2017 low to trade at levels not seen in 34 years! There’s not been a single fresh major catalyst for the declines with the depreciation seen likely an example of the markets getting jittery as MPs return from their summer recess and event risk ramps up markedly.

GBPUSD has dropped below the January 2017 low to trade down to 1.1958 this morning. You have to go back to the 1980s to find a lower price. Source: xStation 

It is worth pointing out that the multi-decade lows don’t include the October 2016 flash crash where lower prices were seen amidst the pandemonium, and while it remains unlikely we get a repeat move anytime soon, the chances of a sizable swoon lower are rising. 3-month volatility in the pound has surged of late, with markets now pricing wilder swings in the currency than in EM currencies such as the Brazilian Real and Mexican and Colombia Peso - markets that are traditionally subject to far higher volatility than sterling. 

With the chances of a General Election rising the question is clearly whether the calling of one would be positive or negative for the pound. In the near-term there’s an argument that heightened uncertainty could weigh on the market, but this holds less water considering the high levels of uncertainty that would persist if a GE wouldn’t be called. Sending Britons back to the polls opens up a wider range of outcomes that include higher probability of extreme scenarios compared to the current state of play and therefore increases market volatility going forward. For the time being traders are buckling up for a bumpy ride and any high conviction calls are few and far between given the inherent unpredictability when politics takes a prominent role in moving the markets.   

Construction data disappoints

For the second day running there’s been some disappointing soft data from the UK with the construction sector seemingly faring even worse than the manufacturing equivalent. A PMI reading of 45.0 vs a consensus forecast of 46.5 marks the 4th consecutive fall in this metric while new work experienced its sharpest drop since March 2009. Furthermore business optimism sunk to its lowest level since December 2008 but there’s been next to no market reaction to this data with the pound clearly nonplussed and traders far more interested in the latest political news.  

Construction activity in the UK continues to struggle with the latest PMI reading coming in worse than expected and still well below the 50 mark which denotes expansion/contraction. Source: Bloomberg