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FX round-up: Sterling rides higher, seen by some as possibly undervalued

By Andrew Schonberg

Date: Monday 27 Mar 2017

FX round-up: Sterling rides higher, seen by some as possibly undervalued

(ShareCast News) - Sterling posted robust gains on major crosses on Monday, in part due to a weaker dollar as traders pondered whether US President Donald Trump can deliver on his promises and also as some in the market believe sterling may be undervalued after the UK's Brexit vote in 2016.
At about 17:20 GMT, sterling was up 0.85% to $1.2579, and improved 0.12% to €1.1567. The dollar spot index was down 0.5% to $99.131. The British unit also rose on the aussie, loonie, kiwi and yen, and flew higher against the rand, as did the dollar.

The rand's hefty decline came as South Africa's President, Jacob Zuma, recalled finance minister Pravin Gordhan from visits to New York and London at the eleventh hour, stoking chatter that he was about to reshuffle his cabinet.

Returning to sterling, its gains on Monday came largely after Trump failed to get his Healthcare Bill okayed by Congress, which led to investors pondering what would come next.

"If he (Trump) can't steer his first major piece of legislation through Congress will he be able to implement the rest of his programme (including fiscal stimulus)?" pondered Nicholas Hyett of Hargreaves Lansdown in a research note.

It was also a byproduct of Trump and US Treasury Secretary Steve Mnuchin commenting that the dollar was too strong, said Jasper Lawler, senior market analyst at London Capital Group.

That caused the GBPUSD to break higher, the British currency having coming off depths sparked by its Brexit vote last year. Prime Minister Theresa May was due to kick-start formal negotiations with the European Union on Wednesday.

"A seven-week high for sterling three days before the government triggers Article 50 was probably not quite what 'Project Fear' had in mind," said Lawler.

"Another sterling swoon once Article 50 is triggered and issues like the EU exit fee provoke fears of a hard Brexit seems likely. But it also seems increasingly apparent the market believes sterling is undervalued," he said.

James Hughes, chief market analyst at GKFX, said, referring to the often-vague Brexit saga, the more detail that traders received, the more it eased the uncertainty that caused sterling's slump last year.

"With Article 50 set to be triggered and the formal negotiations about to begin this can only bring more detail, something that should continue to be good news for sterling," said Hughes.

"For me, the most likely eventuality is that the Brexit formality brings more detail and more upside for cable with a potential test of the upside levels at $1.2700," he said, noting disappointment could see $1.2400 tested.

"For now, I don't think it expects much and Theresa May's announcement that Article 50 has been triggered could well be a bit of a damp squib from a market point of view."

Now turning to the greenback, the US currency lost traction against the euro, loonie, kiwi and yen, but gained on the aussie and impressively against the rand, as mentioned earlier.

"A sharp slide in US yields has seen the US dollar slide to four month lows on its trade weighted index, and against the Japanese yen," said Hewson of CMC Markets UK.

Lawler continued, commenting on the Trump-Mnuchin assertion that the dollar was too strong.

"Positioning was very dollar bullish at the start of 2017 so the political risk is causing an unwind, despite the Federal Reserve lifting interest rates in March," he said.

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