Sterling continued its recovery throughout Wednesday’s trading after a turn around in the stock market losses earlier this week; the FTSE 100 outperformed expectations on Tuesday and this continued into Wednesday, this indicates a strong global demand for UK assets. At the time of writing GBP/EUR is currently sitting at 1.1962 and GBP/USD, 1.3453.
The continued demand for UK assets could provide sterling the fuel it needs to break through and hold above the 1.20 barrier as we head into February. Investors are now fully positioned for another interest rate hike from the Bank of England after their surprise rate hike in December. Next week’s meeting following December’s fashion may allow sterling to continue appreciating against its G10 Counterparts. In an environment where interest rates are rising, the FTSE benefits.
The recovery comes after a global market sell off on Monday. The current global uncertainty surrounding Russian military movement into neighbouring Belarus and Ukraine caused the market to switch to a ‘risk off’ position. With global western superpowers and NATO demanding de-escalation of Putin and Russia, dialogue and diplomacy are urged rather than showings of military might. If Russia continues to advance further along its borders, we may see the market repeat it’s behaviour and sell off the pound and UK stocks again?
Political turmoil in the UK continues to rear its head as Boris Johnson and his party members are currently under investigation for breaking lockdown restrictions on several occasions. As number 10 awaits detailed guidance on when the Sue Gray report will be published, sterling remains largely unaffected. If Sue Gray’s report provides evidence of wrongdoing and lying from the prime minister, instability caused by Boris’s step down or removal could cause sterling to lose any momentum it brought into the new year.
There are no further major data releases coming out of the UK this week, if you have any questions regarding the current political state of the UK and Europe, please get in touch with your account manager here at Lumon.
After Monday’s opportunity to sell euros and buy sterling, we’ve returned to the 0.83’s for eur/gbp, a level we’ve seen several times in the latter half of 2021. The single currency continues to hold out against sterling stopping any lengthy progress into the high 0.82’s.
The European Central Bank’s continued its stance that inflation rates in the region are transitory. The ECB’s stance of no interest rate rises until December 2022 earliest is in opposition to its counterparts at the Fed and BoE. “What’s needed now to get the EUR to rally meaningfully is a wage jump that’s both a) imminent and b) powerful so that the market feels confident enough to price in a June ECB hike, and perhaps a second in December, with no particular concern about currency strength derailing the process,” says Jalinoos. The current wage growth in the eurozone has grown from 2.5 to 2.9% in the third quarter of 2021, this would need to be above 3% to be in line with the ECB’s 2% inflation target.
With the Fed and BoE poised to raise interest rates throughout the year, we may see continued losses for the euro against the two. If you have any questions, please contact your account manager here at Lumon.
On Wednesday evening all eyes focused on Federal reserve chairman Jerome Powell’s post meeting press conference. Chairman Powell’s hawkish tone provided the greenback with a boost to make some ground back on its European and British counterpart. At the end of Wednesday’s trading, we see cable rates and USD/EUR rates sat at the higher end of the days trading for USD after Powell’s announcement.
Although the announcement provided no movement from the current interest rate level of 0.25%, the confirmation that the conditions will soon be appropriate to raise rates gave USD rates room to grow. The FOMC decided it will also continue to reduce it’s bond buying stimulus programme, the FOMC said “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labour market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March”.
The current inflation level sits at 7%, a 40 year high. The FED states this level has been caused by supply chain imbalances caused by Covid -19. All eyes will now be focused on March’s meeting after Powell stated, “The committee is of a mind to raise the federal funds rate at the March meeting assuming that conditions are appropriate for doing so”.
The fed concludes the two-day meeting today where they’ll announce the durable goods orders and the non-defence capital goods orders. The US Census bureau data measures the orders received by manufacturers for goods designed to last 3 years or more. The final figures provide an insight into US production activity. These goods, services and structures produced within Q4 will be released in the GDP Annualized. Also, the release provides a gross measure of market activity and economy growth pace. Will we see a better-than-expected percentage than the consensus 5.4% for the quarter? If you have any questions on how this will affect USD rates, please contact your account manager here at Lumon.
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