Following the shocking attack on a crowd celebrating Bastille Day in the French city of Nice last Thursday, which left 84 people dead, France is now on high alert after President François Hollande declared this a terrorist act and extended the country’s ‘state of emergency’. There are currently no clear signs that this is negatively impacting markets or causing any material risk aversion in foreign exchange. For example, the euro’s value against the safe haven Swiss franc has barely moved from around the 1.09 mark since Thursday morning.
The euro is still offering some resistance around €1.20 to the pound’s advance. Thursday’s attack in Nice will certainly have negative political implications for UK/EU ‘reintegration’ after Brexit highlighted growing sentiment in favour of border control.
Sterling
The market called Thursday’s Bank of England interest rate decision wrong and the pound has quite rightly rallied sharply as a result. Over the past seven trading days, the pound has now advanced by roughly four per cent against the USD, 3.5 per cent against the euro and by 4.3 per cent against the Swiss franc.
The BoE kept interest rates unchanged on Thursday, wrong-footing both investors and economists who felt a ‘post-Brexit’ cut below 0.5 per cent was more likely. Overnight, the pound tried and failed to break the €1.21 barrier against the euro, with numerous orders placed by corporates triggered around €1.20.
The €1.20-€1.22 ‘resistance zone’ in £/€ will now be a key focus as businesses assess the durability of the pound’s rally. This is because “most officials” at the BoE on Thursday said that GBP-negative stimulus was likely at the next meeting on August 4, which gives them more time to assess Brexit and consider a “package of measures”.
US dollar
The GBP/USD rate tried and failed to rise above the $1.35 mark overnight, with markets now identifying this as a major level for the pound to rise above and hold on to post-Brexit. The move higher in Cable came before yesterday’s top tier US retail sales report. Just over a week ago, Cable was trading around $1.28 but has since rallied by nearly five per cent above those 31-year lows after positive UK political developments this week and Thursday’s Bank of England decision. Fed member Dennis Lockhart (voter) also issued dovish remarks on Thursday. US retail sales and inflation data was released yesterday and expectations pointed to a slower rate of growth in both figures. But better-than-expected US data could help aid an end-of-week recovery for dollar.