The British Pound Rate Against The Euro Shows The Best Of UK Yield Expectations Over 2 Weeks
The British pound continued to rally on Monday, with the pound-to-dollar exchange rate (GBP / USD) peaking at around 1.3640.
However, GBP / USD fell late in the day as global equities retreated in yet another episode of fear surrounding the impact of soaring global energy prices. The pair consolidated just above 1.3600 on Tuesday.
The exchange rate of the British pound against the euro (GBP / EUR) posted net gains to reach two-week highs around 1.1730 as rising domestic yields and expectations of tightening in the Bank of England helped support the British currency and offset reservations about the impact on growth of rising energy costs.
Brexit concerns remain in the background
Markets followed domestic policy developments on Monday with opening speeches at the Conservative Party conference by Chancellor Sunak and Brexit Minister Frost.
Frost noted that everything had to be tried before triggering Article 16 and opting out of the Northern Ireland protocol, which limited market reaction.
The underlying rhetoric was still harsh as he added; “We cannot wait forever. Without an agreed solution soon, we will have to act, using the Article 16 safeguard mechanism, to deal with the impact of the Protocol on Northern Ireland. “
Unicredit noted; “Renewed tensions between the UK government and EU authorities over Brexit regulation have so far been ignored.”
ING added; “For now, the pound does not appear to take into account a significant risk of trade tensions with the EU or geopolitical risk in general.”
Energy prices eclipse domestic politics
However, markets became more focused on soaring energy prices, inflationary pressures and global risk conditions.
Oil prices firmed to a 3-year high on Monday, adding upward pressure on global energy prices that will trickle down to higher retail prices.
Unicredit added; “The gradual easing of the UK energy and fuel crisis could help investors refocus on the outlook for monetary policy after the BoE’s hawkish turn in recent weeks.”
Viraj Patel, FX and Global Macro Strategist at Vanda Research commented; “Much of a consolidation of the massive selling from last week, with a return of a broader risk appetite helping to lift risky currencies like the pound sterling”
He added; “We won’t read too much about the Chancellor’s additional job support measures announced today – and there are still a myriad of headwinds.”
DBS Bank remains cautious on the outlook for the pound; “The problems in the UK’s fuel supply chain are unlikely to go away too quickly. This dilutes the possibilities for the GBP to profit from a possible political tightening, as it eats away at the growth potential of the UK. “
He considers that technical considerations could push GBP / USD as low as 1.3163 / 58.
US dollar rebounds as stocks retreat
The US dollar first fell on Monday, but rebounded later in the session as global equity markets came under further selling pressure.
The euro / dollar exchange rate (EUR / USD) strengthened to a high of 1.1640 before falling to 1.1600.
Danske Bank maintains a bullish outlook for the dollar amid fractures in the history of global growth.
“We continue to see more downside risk and would recommend selling a potential rise in EUR / USD.”
In contrast, TD Securities considers the US dollar overvalued and preaches caution; “As the short-term dollar bias tends to increase, we are reluctant to continue moving at these levels”,
TD added; “The key for the markets in the coming weeks is to determine the extent of the risk premium already taken into account versus how these factors play out.”
Westpac expects Fed tightening expectations to support US currency; “The US dollar is only partially valued for the Fed’s expected tightening program.”
The Commonwealth Bank of Australia has taken note of the ongoing discussion regarding the US debt limit. The bank noted; “In our view, the unresolved debt ceiling can support the dollar in the short term. “