Selling of British pound accelerates, but a turnaround beckons
Image © Adobe Images
- Market rate at publication:
GBP / EUR: 1.1593 | GBP / USD: 1.3550
- Bank transfer rate:
1.1368 | 1.3270
- Specialized transfer rates:
1.1535 | 1.3482
- Get a better than bank exchange rate quote, here
- Set an exchange rate alert, here
The sterling decline accelerated during the midweek session as an earlier stabilization proved to be fleeting and sellers took control for a second day, however there are reasons to expect an imminent turnaround.
The declines come amid fears the UK is entering a period of runaway inflation and slowing economic growth amid soaring energy prices and continued supply chain disruptions centered on fuel deliveries.
“The British pound turned out to be hit by a combination of risk negativity, rising fuel costs and skepticism about the BoE’s ability to continue Q4 hikes. Weaker growth is hardly constructive for the pound, ”says Jeremy. Stretch, Head of G10 Forex Strategy at CIBC Capital Markets.
The pound-to-euro exchange rate is down another quarter of a percent at the time of writing to 1.1558 while the pound-to-dollar exchange rate is down 0.60% to 1.3461.
Among its G10 peers, the pound only registered advances against the New Zealand dollar and the Norwegian krone.
Above: Four hour chart showing GBP / EUR (top) and GBP / USD (bottom).
Currency transfers: get a retail exchange rate between 3 and 5% higher than that offered by the main banks, learn more. (Advertising).
Interestingly, both the NOK and the NZD have made strong surges based on the assumption that their central banks would be the first in the G10 to raise interest rates.
The GBP also benefited from this transaction, with the Bank of England expected to rise in early 2022, well ahead of most of its peers.
The market could therefore unwind rate hike expectations and penalize currencies that had benefited before this week.
“It’s the positioning (not the trucker shortages) that is causing the huge weakness,” says Viraj Patel of Vanda Research. “Leverage funds had built up significant positions in GBP and NZD (on hawkish Central Bank transactions). No surprise, both have underperformed over the past week … just another positioning without risk to unwind in the foreign exchange markets “.
Queues at some of UK gas stations are nonetheless symptomatic of consumers increasingly wary of supply issues in the global and domestic economy and the biggest risk to the economic recovery is that they retreat further .
The Bank of England released its August Money and Credit Survey on September 29 and found consumers continue to adopt the Covid-era behaviors of giving up on credit and save money.
Samuel Tombs, UK chief economist at Pantheon Macroeconomics, said consumers “must quickly lose this cautious mindset if the recovery is to progress, given the impending decline in real disposable income in the fourth quarter.”
But it’s hard to see how headlines about soaring energy prices and the prospect of shortages of goods before Christmas will encourage anything other than caution.
The warning signs of economic growth come with an increasingly finicky Bank of England fears that current inflationary pressures on the supply side may become more entrenched.
Bank of England Governor Andrew Bailey said the prospect of a rate hike as early as Q4 2021 could not be ruled out if the labor market continues to perform well and inflation estimates continued to climb.
Under normal circumstances, such a signal on UK interest rates would support the pound sterling, but market sentiment has shifted to fears that the Bank is guilty of a policy error.
‘UK real yields implied by long-term inflation-linked bonds remain historically negative and weigh on sterling amid fears that current price pressures induced by the supply shock will have a more lasting impact on UK inflation, ”says Elias Haddad, senior currency strategist. at the Commonwealth Bank of Australia.
But is the sale of the book excessive?
Hints that it might be excessive include a view that inflationary pressures are not unique to the UK; indeed, the euro zone is also confronted with an energy crisis whereas the Euronews channel denounces Wednesday morning a lack of truck drivers in Europe.
The United States faces similar supply logistics issues, and China faces total blackouts due to a lack of coal and natural gas.
The pound may be under pressure now, but investor sentiment is feverish and the fact that the UK is materially worse than anywhere else should be blinding evidence for this to become a longer term trend.
For now, this is not the case.
“The pound’s weakness is not expected to last beyond the short term,” Asmara Jamaleh, economist at Intesa Sanpaolo, said in a briefing to clients on Wednesday.