Two major market themes are dominating analysts attention at the moment. The dramatic collapse in the pound, and the question of whether its gone too far, and the global reflation theme. As for the pound, analysts say that the news which suggests UK PM Theresa May is willing to negotiate – with parliament, if not with the rest of Europe on the terms of Brexit has come as some relief, but whether that debate and scrutiny is going to come with any ability to change the terms of the Government negotiations is a completely different question. FX strategists reckon the pound will be in for a bumpy ride as the market tries to find a new range after the dramatic fall of recent days. A fall which has taken it to extreme levels. Looking at a chart of the real effective index for the pound from pre-1992 to now, shows it is now at extreme levels. As for the reflation theme, some strategists say the evidence of reflation momentum rather that deflation tail risk has left consensus asset allocation exposed. Heading into the home straight of 2016, the question is how much of that consensus positioning will be unwound.
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