Jordan Richardson
October 7, 2021

Sterling Continues To Take Advantage Of A Change In Risk Sentiment

As we enter the latter stages of this week, we have seen Sterling continue to take advantage of a change in risk sentiment from the market. On Tuesday this week, we saw GBP/EUR close at its highest level since mid-August. The GBP/EUR exchange rate closed at 1.17, the last time it closed above here was on 16 August. A two-cent rise on last week’s drop saw rates trading around 1.16 at one point. Investors are building expectations of a Bank of England (BoE) interest rate hike in early 2022 due to the UK’s superior bond yield advantage relative to the neighbouring Eurozone. If the market is feeling a little more daring in these times, then we will see Sterling reap the benefits.

Cable rates sat at 1.36 after an advancement back into the mid 1.35’s during Wednesday’s trading. USD continues to hold strong against GBP as the greenback is still considered the safer haven currency in times of uncertainty. Yesterday we briefly saw GBP/USD rates push into the 1.36 range.

As we have seen over the last week, the major focus in the UK has been on supply and demand issues with gas, fuel, and lorry driver shortages. Rising inflation levels due to supply chain issues have caused the BoE to take a more hawkish note moving forward. Governor Bailey stated in his minutes last Thursday that he believed this current surge in inflation is transitory. Charles Porter, SGM Foreign Exchange Ltd says “Inflation combined with more active consumer and labour markets in the UK has pushed the BoE towards considering a potential rate hike later this year, the UK is currently placed in front of the rest of the slower moving G10 pack”.  Could we see an interest rate hike before the year is out? FX strategists are optimistic that it will happen.

European Central Bank (ECB) Outlining For A Proposed Interest Rate Hike

On Wednesday the Euro dropped below the resistance level of 0.85 against Sterling, pushing to a near 2-month low. As market sentiment shifts back towards a bigger appetite for risk, the sell-off has caused the Euro to drop further against the Dollar also.

EUR/USD is the most traded currency pairing globally and the exchange rate broke below the mid 1.15’s on Wednesday. The continued drop of the Euro against the Dollar has taken the currency pair below the previous 2021 low of 1.16. Bank of America analysts expect the pairing to continue to drop to below the 1.15 marker for this year.

The softening of the Euro could be attributed to the speed at which the ECB is outlining for a proposed interest rate hike. The bank is behind the BoE and the Federal Reserve (Fed) in their proposed rate hike schedules. The bank’s cautious tone can be attributed to their belief that current inflation is transitory and that inflation levels will return to the 2% level and become anchored there.

Dollar Continues to Assert Dominance Over Major Currencies

The Dollar has continued to assert its dominance over a handful of major currencies as we enter Thursday’s trading. The greenback is sitting at 1.36 against GBP and 1.16 against the Euro. Nervous investor sentiment is propelling USD this week as the safer haven currency benefitted from a sell off on global markets.

The reasons behind the USD rally are relatively clear; the Evergrande concerns in China are still in the headlines, the Chinese government has still not committed to bailing out the failing property giant and the market is anticipating the knock-on effect of the firm going under. Global supply and demand issues and the more volatile equity markets give the USD a push against all major G10 currencies.

Roberto Mialich, FX Strategist at Unicredit expects “USD to remain healthy ahead of the release of US Labour data”. The data is released this week on Friday, the data is expected to be the “main focus in the coming days”. Mialich expects the FX market to be heavily influenced by the data.

Many members of the Federal Open Market Committee (FOMC) have said they are interested in the September labour market figures; they have stated this will sway their decision on ending the current quantitative easing program.

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