– GBP / EUR supported at 1.1452, with a view to a return to 1.17.
– Falling bond yields offer a balm to battered global markets.
– GBP rally subscribes to EUR, poses risks to BoE target.
– The budget, the reserve in USD, world history dominate the short term.
Image © Adobe Images
- GBP / EUR: spot rate at time of writing: 1.1535
- Bank transfer rate (indicative guide): 1.1231-1.1312
- FX specialist suppliers (indicative guide): 1.13628-1.1454
- More information on FX Specialist pricing here
The pound-to-euro exchange rate held up as risky assets hit a global bond market slowdown that confused investors after the pound rebounded to year-long highs, which will be back in perspective this week as the dust settles and national attention turns. to the budget of Chancellor Rishi Sunak.
The British Pound had stabilized against the Euro at Friday’s close after retracing an earlier rally of 1.1557 around Sunday’s open at 1.1699 in the early hours of Wednesday morning and during the Asia session, until the bond market breaks down.
It was just shy Pound sterling liveLast week’s armchair projection, although the GBP / EUR pair was canceled mid-week when the euro appeared to benefit from a capitulation of emerging market carry trades, prompted by the crescendo of a violent liquidation of bonds.
Emerging markets had been re-inflated in recent weeks by carry trades financed by the euro and seeking yield, the closing of which forced them to buy the euro by default.
“This saving of returns is probably a slowdown rather than a roadblock,” says Mark McCormick, global head of FX strategy at TD Securities. “Markets will focus on President Powell’s remarks Thursday and on leading data, including payrolls.”
Above: Sterling Vs The Majors Over Selected Periods. Source: Netdania Markets. Click for a closer inspection.
The turmoil in the bond market left stocks and currencies at risk under pressure heading into the weekend, even as the two-year segment of the U.S. “ yield curve, ” a time frame over which the Federal Reserve (Fed) likes to calibrate borrowing costs, lost altitude.
Pound Sterling Live has its own theory of recent sterling price action which would imply exaggerated movements in the bond market to be expected, especially in a reflation-driven environment where questions are asked. on the commitments of decision-makers to support the markets.
But with US two-year yields returning to the midpoint of the 0% to 0.25% fed funds rate by the close on Friday, and a host of Fed policymakers, including President Jerome Powell, expected to speak later this week, the pound is in a good position to benefit. any recovery among the currencies at risk.
“At the moment, we are sticking to the pound against the EUR and CHF for a long time, while anticipating gains against the USD at 1.45,” said Paul Robson, head of G10 FX strategy at Natwest Markets. “We closed our long EUR / USD position a few weeks ago in part because we believed the EUR would become a preferred funder for EMFX buyers – to the extent that this occurs, offsetting the EMFX positioning may also help support the EUR and EUR. crosses.”
Source: Natwest Markets. Position of the central bank on the appreciation of the exchange rate.
“Central banks stepped in to counter a sell-off in bond markets, but with mixed results,” says Mathias Van der Jeugt, head of research at KBC Markets. “EUR / GBP rebounded from the 0.86 area yesterday and initially rallied to trade north of 0.87. Comments from Schnabel and Lane, however, depressed the pair, currently at 0.869. For the EUR / GBP rebound to continue, it should at least close above 0.87. Bank of England chief economist Haldane believes there is a tangible risk that the inflation is proving more difficult to tame, forcing policymakers to act more confidently than what is currently valued in financial markets. “
The British pound remained a comparative outperformer even amid volatile risk assets, after closely following the US dollar, euro and Chinese yuan in the week’s rankings. This could remain the case if the pound is somewhat interested in acting as a pressure relief valve for the trade-weighted euro, as it increases upside risks to the euro. bank of englandThe BoE inflation target outlined by BoE chief economist Andy Haldane last week.
“It was such a belligerent speech as one would expect at this point in the pandemic,” said Sanjay Raja, an economist at German Bank. “A successful stimulus budget will rest on three pillars. The first is to avoid jobs at the edge of the cliff. The second is to provide adequate support to households and businesses. And the third is to implement structural reform through increased investment. Our best guess – at this point – is that the Chancellor largely provides support for jobs, households and businesses, but fails to invest in the side. ”
Source: Oxford Economics.
BoE rate regulators are increasingly aware of the upside risks to their inflation target rather than the downside, a predicament where a rally in its exchange rates could serve a virtuous goal by eating to import costs. Meanwhile, the opposite is true with the Central European bank (ECB), who recently expressed concerns about excessively high exchange rates and bond yields.
In a market subscribed and administered by an inflation targeting regime, the relative positions of the BoE and the ECB could mean that the path of least resistance for the pound rate against the euro is on the rise. even without a nascent optimistic sentiment towards the UK economy. .
GBP / EUR forecast 2021
Period: Full year 2021
FX Guide for Businesses
“The roadmap for easing restrictions has reinforced our view that the UK will be one of the best performing countries among advanced economies,” says Andrew Gooodwin, UK chief economist at Oxford Economys. “The structural features of the economy and the prospect of further fiscal stimulus in next week’s budget mean the UK is expected to be one of the best performing countries of the major economies this year. Recent developments are broadly consistent with the roadmap and show a GDP increase of 5.5% in 2021, a performance that we expect to improve only by the United States, Singapore and Spain. “
This precedes Chancellor Rishi Sunak’s budget on Wednesday, which is the highlight of the national calendar. Speculation suggesting that a cocktail of tax support and possible tax increases will be announced may be politically controversial but may not necessarily be subject to objections from the markets.
Above: GBP / EUR at daily intervals with 14-day average and Fibonacci retracements of the January 2021 rally. GBP / USD in red, EUR / USD in blue with 2-year GB bond yield in purple and Yield of US 2-year bonds in yellow. Click on the image for a closer inspection.
This member of the Pound Sterling Live team has been concerned about something since the end of last month and has a theory that seems to be absolutely at stake, which implies that the British pound and the rate of the British pound to the euro will remain. at the forefront of the main risk currencies. in any renewed expression of reflation trade, as it plays an important role in facilitating further dollar depreciation pending by taking the hot air out of the trade-weighted euro.
The idea is that the market targeting inflation 2021 is forced to raise the GBP / EUR pair in a range of 1.17 to 1.20, so that, thanks to its 15% weighting in the Euro TWI, it creates leeway for the EUR / USD to accommodate an additional dollar. depreciation without too blatantly compromising the ECB’s inflation target for Frankfurt. This requires the GBP / USD to rise to 1.43 over weeks, if not days.
There is an assumption that the dollar’s depreciating pressure results from a significant change in a certain basket of foreign exchange reserves that at least reduces the greenback’s share of the overall pie. Pound Sterling Live was encouraged to read in a January post from HSBC negative correlations of the dollar and EUR / USD with the trajectory of central bank reserve flows.
Source: HSBC Research.
“There is still little evidence that reserve managers shy away from the USD as the primary reserve currency of choice. The euro is struggling to profit from the modest fall in the USD,” writes Dominic Bunning, manager. research on European currencies at HSBC, in an early January review on International Monetary Fund (IMF) data for the third quarter of 2020. “While the share of the USD is now down by around 1.1 ppt in the last four quarters, the share of the euro has only increased by 0 , 3 pp. This is even after the announcement of the Next Generation EU fund, which was seen by many as a game changer in terms of the perceived pooling of euro area sovereign risk. Over the past year, the biggest “gains” from the reserves held really don’t come from any of the usual suspects. ”
The dollar index fell in the third quarter of 2020 while the euro-dollar rose and both are negatively correlated with the direction of their overall share in central banks’ foreign reserve baskets. This indicates that the dollar increased its share of the basket in the third quarter of last year, while the euro saw its share fall.
HSBC has a bearish view of the pound sterling for 2021, although since around January 13 and the period following the above revision, the euro-dollar has fallen since the start of the year and the index of the dollar has gone up. The Dollar Index rose 1.12% for the year on Friday and the Euro-Dollar fell -1.05%. This is consistent with the speculative theory of Pound Sterling Live.
Above: Dollar index displayed at daily intervals alongside EUR / USD (blue).