- Strong midweek gains for the GBP
- But no clear trigger
- Which means reversal is possible
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The British Pound hit its stride heading into the mid-week session, making strong gains against the Dollar, Euro and all other major currencies.
There was no clear trigger for the advance, but an improvement in global investor sentiment during the US equities trading session could have helped the pound which tends to gain in such circumstances.
However, a look at the dashboard shows a clear outperformance of the pound sterling, which suggests a real idiosyncratic demand for the British currency:
In fact, it’s not just in the G10 space that the pound has outperformed, as gains have also been recorded against some big names in Asia, emerging markets and Eastern Europe:
The generalized nature of the advance therefore cannot be explained by broader risk trends, as some currencies in the basket above would almost certainly advance against the British pound if global sentiment were in control.
The exchange rate between the pound and the euro rose 0.40% at one point on Tuesday to reach 1.1757, the exchange rate between the pound and the dollar successfully defended lows at the level of 1, 25 and climbed to 1.2578. (Set your exchange rate alert here).
The gains come amid a dearth of prime event risk for the pound, although it saw some volatility on Monday and Tuesday as global stock markets fluctuated and political intrigue was offered as the form of a vote of confidence in Prime Minister Boris Johnson.
“The vote of no confidence may have been a big deal politically, but as far as the markets are concerned, it doesn’t seem to have had a knock-on effect. The sterling trade-weighted index is practically unchanged,” said Marshall Gittler, head of investment research. at BDSwiss Holding AG.
Above: evolution of the value of GBP/EUR (blue) and GBP/USD (orange) during the last 24 hours.
The pound could nevertheless come under pressure against the euro on Thursday if the ECB signals that a 25 basis point rate hike will take place in July while validating market expectations for a potential further hike of 75 basis points on the rest of the year.
“The Governing Council of the ECB is very likely to communicate an end to net asset purchases next month as well as rate hikes in July and September. This will also likely signal that further normalization is likely in the future. beyond that,” says economist Nick Kounis of ABN AMRO.
Such moves are now widely expected by investors and therefore should not offer too much volatility for the Euro.
However, currency analysts are watching for any signal that the ECB could ‘go big’ and hike 50 basis points at one of the next meetings, saying a more conventional 25 basis point hike is not enough. given the extent of inflation in the euro area.
This could ignite a fire under the Euro and send the GBP/EUR exchange rate lower over the weekend.
The Bank of England will then focus on June 16, when it will likely make another 25 basis point interest rate hike.
But the rate hike comes amid soaring UK inflation rates and a slowing economy, conflicting forces that don’t necessarily offer a favorable combination for the pound.
“A bigger issue for UK financial markets at the moment is the country’s move towards stagflation. This will keep UK real yields deeply negative and means the pound will trade at a significant discount to fundamental equilibrium for a while. some time,” says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia.
However, new research from investment bank Investec finds that “gloomy macro expectations for the UK may be overstated” and therefore forecasts a recovery in sterling over the next few months.
The global lender and financial services provider said that although it has lowered its UK economic growth forecast for 2022 and 2023, it does not believe a UK recession is inevitable.
Instead, strong wage momentum and the spending of savings built up during the Covid pandemic will provide a cushion for the economy during the “cost of living crisis”.
“Some of the gloomy macroeconomic expectations for the UK may be overblown,” says Philip Shaw, chief economist at Investec in London. “Wage and employment dynamics are strong, as are buffers from high savings.”
“We still expect the pound to appreciate, especially against the USD,” says Shaw. “From a currency perspective, we think the most likely scenario is for the pound to rally after its year-to-date weakness.”
Investec expects the GBP/USD exchange rate to trade at levels of 1.30 at the end of 2022 and 1.37 at the end of 2023.
“Vs the euro, we expect more limited gains. Some of the gloomy macro expectations for the UK may be overstated, but as policy rates start to rise across the euro zone, this could support euro demand,” Shaw said.
Investec forecasts a EUR/GBP exchange rate of 0.85 at the end of 2022 and 0.84 at the end of 2023.
This translates to a GBP/EUR forecast of around 1.1764 and 1.19.