Cable got a quick 70 pips pop lower as markets reacted to a trade-related headline
Just when you think the pound could catch a further break to the upside after good news from wages data here, reality comes back to bite it hard. The pound suffered a quick drop across the board, falling more than all other currencies. At the same time, there was a slight weakening in the euro and there was a notable dip in E-minis which subsequently prompted further declines in the equities space.
So, what happened?
The cause appears to be a trade-related headline here as China seeks to retaliate against US by requesting permission from the WTO so that it can impose trade sanctions against the US. It took a while before the news hit the main wires but the market had already started to react and I'm certain that there were market players who were unable to pick up on it that quickly.
And that would have resulted in stops being triggered and further panic selling/position squaring in fears it was a negative Brexit-related headline. I reckon that is what exacerbated the pound's decline more than any other currency earlier.
As much as pound buyers are quick to pounce on any positive Brexit news, there's also the other side of the story to deal with as well. And when it turns out it was a trade-related headline - particularly a WTO one - the pound recovered some of its footing again.
Despite the positive start to risk yesterday, I will reiterate and emphasise still that market sentiment is relatively fragile. To me, the China trade headline earlier isn't a major one and we all know that WTO proceedings take a very long time to settle anyway.
But if anything, the headline serves as a reminder that all it takes is one negative headline and all the positivity in markets will be sapped out and we'll return back to caution and risk aversion like we are now.
