Yesterday saw the pound rally against a basket of major currencies following a dismal start to the trading week on Monday. GBPEUR dropped below the 1.19 level for the first time since the start of the year, hitting the 1.1870s before making a small recovery. As mentioned, sterling’s recovery continued into yesterday’s trading session with the pair trading above 1.1960 later in the day.
News broke yesterday revealed the UK government would be withdrawing some staff from its embassy in Kyiv. The tensions between Russia and the Ukraine have been building over the last few weeks with reports suggesting 100,000 Russian troops are stationed at the border. Political tensions have the ability to effect global industry and often cause financial markets to react in a negative way to what is seen as ‘risky’ investments. This often leads so a sell-off of the pound and UK stocks, both of which felt the impact yesterday. In times of uncertainty investors then tend to move assets to ‘safe-havens’ such as the USD, JPY and gold which have all benefited amid the ongoing crisis.
In UK politics, pressure continues to mount on Boris Johnson with news breaking on Monday evening about a birthday party that took place in No 10 for the Prime Minister in 2020, while the rest of the country were in lockdown. The Metropolitan Police also announced that they have launched investigations into events that took place at Downing Street and Whitehall that may have breached Covid regulations.
So far, the political tension has done little to affect sterling rates, however, a resignation from Johnson and subsequent leadership contest could create political uncertainty in the UK and cause the pound to suffer.
Economic data releases are light in the UK for the remainder of the week so many will be watching the political landscape for any clues on where rates could move next. The US Federal reserve meet this evening and an interest rate hike or suggestion of one could cause the dollar to strengthen, weakening the pound in the process.
In Europe, Monday presented a window of opportunity for clients looking to sell euros and buy pounds. EUR/GBP was trading above 0.84 for the first time since the new year. However, throughout yesterday’s trading the single currency lost most of the ground gained and the pairing was back trading in the mid-0.83s, a level we have been accustomed to this year.
Against the dollar, the euro continued to lose ground with the pairing spending most of the day in the later 1.12 region. The single currency has lost over 8 cents against the greenback since June last year. The political instability in the Ukraine will do little to support the euros value against the dollar with Europe’s ongoing energy crisis and reliance on Russian gas continuing to make headlines.
More positivity for Europe, high vaccinations and a willingness to live with the virus appears to be helping stem the negative economic impact of the omicron wave. As infections drop and countries loosen restrictions, we will see an increase in economic activity within the bloc which could provide support for the euro.
The European markets will also be watching the Fed’s interest rate decision with keen interest. So far, the European Central Bank (ECB) seem the most reluctant out of the three major banks to raise rates. Investors are expecting the Bank of England and Fed to both move on rates throughout the year with the ECB previously stating that they will not hike rates until 2023. This stance is likely to continue to put pressure the euros value as it has for recent months.
In the US, the dollar experienced a more subdued trading session following the gain’s made on Monday amid a global shift in risk appetite. Initial concerns around the rising tension between Russia and the Ukraine appear to have calmed. The greenback lost ground against pound, Japanese Yen and Canadian dollar amongst others throughout the day.
President Biden is considering deploying several thousand troops along with warships and aircrafts to Eastern Europe in an act to stand up to Russian aggression in the region. As mentioned earlier, the US and dollar are seen as global safe havens in times of political and economic uncertainty. Investors flock to hold US investments during these times which helps drive up the value of the dollar. Therefore, any increase in tensions between the west and Russia could provide further support to the currency in the coming weeks.
US consumer confidence data released yesterday afternoon showed there was a drop from the previous reading of 115.2 to 113.8. The figure was however higher than the forecast level of 111.8 and the release caused no major deviation to dollar rates.
The Fed have begun their two-day policy meeting and will announce tonight whether they have decided to change their current stance on interest rates. Last month, inflation (CPI) rose to a record 7% which is the highest increase seen since June 1982. Pressure has been building on the Fed for several months now. Will we see them finally hike rates to help quell spiralling inflation? Forecasters are not expecting any change in policy at this meeting, however, any comments that suggest a future hike could provide volatility for dollar exchange rates.
If you have any upcoming exchanges involving the dollar, please reach out to your account manager here at Lumon, who can keep you up to date with developments.
This blog post is intended to provide This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).