July 2, 2022
  • July 2, 2022

Back from Brink, but overtaken by GBP / USD

By on May 9, 2021 0

– GBP / EUR is considering rally to 1.16 but gains are slowing
– Pending the realization of bullish recovery forecasts in the United Kingdom
– Is overtaken by the GBP / USD pair during the fall of the USD, global rally
– Probable outperformance of EEC and Asian currencies in the short term

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The Pound-Euro exchange rate could be lifted by a dissipation of domestic political risks this week, but the gains could be slower to materialize than in the past, leading the GBP / USD to outperform the GBP / EUR over the weeks. to come in the absence of any upside surprises to the new forecast of the Bank of England.

The pound fell late last week after Thursday’s Bank of England (BoE) monetary policy decision failed to provide a new catalyst for further excitement, as losses worsened Friday due to price action which could have to do with the results of Saturday’s election.

Monday’s price action will reveal how much investors and traders have been deterred from the pound by political risks that did not materialize over the weekend, even though these are the BoE’s latest outlook that matter most to the outlook for the pound beyond this week.

“The Bank will end its asset purchases before the Fed and the ECB. Meanwhile, his new economic forecast implies that the conditions for a tighter monetary policy could be in place at the end of 2022, ”Ruth Gregory told Capital economics.

Drastic upgrades to GDP forecasts, inflation and a host of other measures had already been anticipated by the market and were followed last Thursday by a quick and almost worrying observation from Governor Andrew Bailey that the risks for all are now on the decline.

GBP to EUR per day

Above: GBP / EUR at daily intervals with 55 day average, Fibonacci retracements and EUR / GBP.

“Despite yesterday’s rally, EURGBP is still capped by difficult resistance .8722 / 32 (March highs). It currently holds more than 55 days ma, ”says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank, which is targeting a GBP / EUR move to 1.1719 in the coming weeks. .

Gov. Bailey’s remarks suggest that the market has already seen and heard all the optimism it is likely to get from the BoE without progress in meeting the bank’s bullish forecast, increasing the importance of data from the BoE. GDP for the first quarter of this Wednesday.

Data from the Office for National Statistics will reveal on Wednesday whether the BoE is still too pessimistic despite huge upgrades to its GDP forecasts, with the bank anticipating a -1.5% quarterly contraction under a third ‘lockdown’ for the last quarter, while consensus and the market is forecasting a decline of -1.6%.

“This should show a solid 1.5% year-on-year, which is considerably ‘less serious’ than feared given the Brexit disruption and strict lockdown, with March activity being strong due to the combination of back from school and a healthy retail month. This should further underline the prospects of a very strong economic recovery in the second quarter and support the pound, ”says Petr Krpata, EMEA chief strategist for interest rates and foreign exchange at ING.

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A surprise on the rise in GDP could allow the pound to rise on its own and benefit from further declines in the US dollar over the next few days, although this will be in June and July before the market and the BoE policymakers have a clearer idea of ​​whether the pending rebound in the UK will really be as strong as is now widely assumed.

The latter could mean that the pound-to-euro exchange rate is slow to move significantly above the 1.16, around which it has recently struggled, given that this particular pair is about half the rate. the exchange-weighted sterling exchange rate and has risen faster this year than the pound-dollar rate.

The strength of the US currency as well as some weakness in the euro in the first quarter has seen GBP / EUR rise faster than GBP / USD so far in 2021, although this momentum has recently reversed and may do so. even more in the coming weeks after the no – farm payroll was a big surprise due to lower market expectations.

“It is now more difficult to see the risks of tantrum typing return in the short term. As US rates consolidate, this creates a more favorable environment for higher yielding, commodity-linked currencies to outperform, ”said Derek Halpenny, Head of Research, Global Markets EMEA and Global Securities at MUFG.

GBP to USD per day

Above: GBP / USD at daily intervals with GBP / EUR.

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The United States added another 266,000 jobs last month, though economists were looking for 966,000 even bigger and almost unheard-of new jobs to be recaptured by a U.S. economy that has been reopened in most areas and is still being pumped out by the thousands. billions of dollars. fiscal stimulus.

However, the market was obviously disappointed with the result and in particular because the figure for the previous month was revised downwards at the same time from + 916k to + 770k.

The payroll data justified the Federal Reserve (Fed) for its own recent policy stance, which led the bank to insist in April that it could be some time before U.S. jobs and inflation data fails are reaching the necessary milestones for the Fed to even begin thinking about a simple discussion of changes to its monetary policy programs.

“The current post of April [non-farm payrolls] The weak USD environment is clearly beneficial for GBP / USD, ”said ING’s Krpata.

Quotes in USD

Above: quotes and performance of US dollar rates over different time periods. Source: Netdania.

Payrolls have already appeared on Thursday and Friday for persuading investors that buying and holding the US dollar may not be the best way to spend time and opportunity as the greenback has fallen sharply by against almost all major developed and emerging market currencies before the weekend.

Meanwhile and elsewhere in the world, the economic outlook is improving and, in some regions, economic data is already starting to surprise on the upside; particularly in Central and Eastern Europe as well as parts of Asia where currencies underperformed at the start of this year.

Among these past underperformers are the Korean won, Malaysian ringgit, Singapore dollar, Russian ruble, Polish zloty, Romanian liev and Czech koruna, which the author says will be among the outperformers in the US market. foreign exchange this quarter, a period in which the likes of the pound sterling and the euro are also expected to continue to rise.

“USD weakness is expected to continue into the coming week,” says Halpenny of MUFG. “We recommend a new USD / RUB short trading idea in addition to our existing USD short trading ideas against the AUD and CZK.”