24/02 – Sterling leaps overnight

GBP: Gift horses and mouths

EUR: Who is right?

USD: Powell fails to scare the markets

Sterling

The pound has got its dancing shoes on this morning, flying to fresh near-three year highs against the USD. What some will try and attach to a strong showing of pro-British sentiment is more likely to be those who are short the pound capitulating and squaring out their positions.

These leaves sterling in a rather interesting position ahead of a Budget a week today and with focus falling almost exclusively on the belief that the NHS vaccination effort can and should allow reopenings along the government’s optimistic timetable unveiled on Monday.

Not to sound flippant on this at all but if you believe that the UK can pull this off then there is every reason to think sterling can pull higher from here – hitting our end of year target of 1.46 in GBPUSD in the coming months – but if caution dictates that there are bumps in the road ahead and at least one more twist in the tale, then ignoring these prices is looking a very large gift horse in its very large mouth.

Euro

The sogginess of German and other European debt markets is not helping the single currency at the moment alongside dour statements from both ECB Chair Christine Lagarde and German Chancellor Angela Merkel.

The yield on UK debt is currently trading at its highest level over its German equivalent in almost 12 months, bringing investors into the pound and out of the single currency. Such a move comes from multiple inputs but confidence in the recovery and the belief that rate rises are coming sooner in the UK than in Europe will be the main drivers.

ECB Chair Lagarde cautioned about a lack of inflation pressures whilst the Bank of England Chief Economist said the UK’s recovery could be ‘one to remember’. Similarly, whilst the UK opens up, Merkel believes Germany to be in the middle of a third wave.

We’ll see who’s right soon.

US dollar

Federal Reserve Chair Jerome Powell toed the line yesterday in front of the Senate Banking Committee, making sure to not scare the horses by talking about inflationary pressures or rising interest rates anytime soon.

US stock markets swung lower yesterday and were a lot more negative before Powell started talking, we hope that his calm words and commitment to monetary support is enough to prevent sizeable declines in risk moving forward. It will be important now to see whether spikes in risk are sold as quickly as dips were bought when things were looking scary.

For USD watchers that translates into one thing; the possibility of a rebound remains strong, especially if equities are kidney punched in the coming sessions. Friday’s PCE inflation measure is the next big data hurdle for the USD.

Elsewhere

One currency that has not weakened overnight versus the pound is the New Zealand dollar aided by the Reserve Bank of New Zealand decision overnight. While rates were kept on hold a forecast chart detailing expected interest rates in the future showed an increase above zero in the future where previously the line had remained stubbornly in negative territory.

Market rates

Today’s interbank rates at 08:22 against sterling. Movement vs yesterday.

Euro€1.165 ↑
US dollar$1.417 ↑
Australian dollar$1.790 ↑
South African randR20.64 ↑
Japanese yen¥149.5 ↑

Have a great day everyone.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.