Sterling’s sensitivity to global stock markets has it struggling against the Euro and Dollar and stabilisation in global market conditions, to stop the continued August falls, is unlikely in the short term, it is predicted.
The Pound slumped sharply against both currencies as fears of further interest rate rises in the United Stated have been stoked by the Federal Reserve confirming that it will do “whatever it takes” to bring inflation back to the 2.0% target, even if that contributes to lower growth and higher unemployment.
The Pound’s sensitivity to global investor sentiment makes it vulnerable to warnings by the USFR, with equity movements the dominant driver of GBP.
Sterling has been weaker than expected, particularly against the euro and typically shows higher correlations to equity markets than the euro (probably given the larger role of financial services in the UK economy).
The Pound to Euro exchange rate fell a sizeable 0.70% last Friday and a further 0.60% on Monday, leaving it at 1.17, while the Pound to Dollar exchange rate fell 0.80% on Friday and 0.30% on Monday. Closing on Wednesday at under $1.165 to the £1.00 or more than 4% lower in value than at the beginning of August. It’s a significant consideration when evaluating an already inflation infested economy and where many products are made overseas and paid for in USD before being sold in Sterling or Euros.
Month-end position adjustments have dominated the FX markets this week with EUR-USD close to parity, which suggests that investors are probably waiting for more sensitive data to decide on positions.
The Euro is better supported against both the Pound and Dollar, making it a better fix, as the European Central Bank intends to hike interest rates sharply over coming months in response to surging inflation.
Eurozone money markets on Monday moved to price in a two-thirds chance of a large 75 basis-point rate hike at the ECB in September after policymakers made the case over the weekend for a large move to tame inflation four times above their target, reported Reuters.
Falling natural gas prices in the EU have also supported the single currency, with the EU also intending to introduce notable reform to European energy markets, with an “emergency intervention”.
Should investors sense the worst of Europe’s energy crisis is near, they might start backing the Euro again, while the ‘perma-bear’ thesis on Sterling remains (the expectation that the value of stocks and shares will fall regardless of market conditions) it remains at risk of further decline against other major currencies.
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