By Matthew Vassallo
The Pound had mixed fortunes last week, with its rebound against the Euro providing some much-needed optimism for anyone holding a GBP position, following a fairly lacklustre display against the single currency of late.
Despite its upturn against EUR, investor confidence in GBP remains fragile, as was evident by the Pound’s failure to put any serious pressure on the 18 months highs it reached against the Euro earlier this month.
Its failure to move beyond this threshold may well be linked to a more cautious approach from investors, already stung by November’s decision by the BoE not to raise interest rates. As has been well documented, this caused a sharp sell-off of GBP positions and in turn a short-term rapid devaluation of its value against not just the EUR, but the majority of its major currency counterparts as well.
With central bank policy makers staying tight lipped regarding a prospective rate hike in December’s final monetary policy meeting of 2021, the will they/wont they debate is likely to be one of the key drivers for sterling’s value over the coming weeks. There is a school of thought that indicates the BoE may choose to take a more tepid approach to the current rising inflation levels, in the hope that there a natural stabilisation of the spiralling inflation numbers, before deciding to force these figures back towards their target rate of 2% by implementing a rate rise.
Looking at the current market rates and it is clear the Pound is still struggling to deceive. Whilst it managed to find some support against the EUR last week as outlined above, it was unable to mirror these gains against the other majors. GBP/USD rates fell back to a month a low before a slight upturn during Friday’s trading, with the USD finding plenty of support throughout much of the trading week.
Whilst President Biden finally managed to push through his infrastructure bill, which has been seen by the majority of analysts as a much-needed win in his column, the US’s overall economic recovery remains underwhelming.
Despite this, investors’ appetite for the USD is untenable, with the global markets suffering as they are due to underlying concerns over the rising covid numbers and the potential economic impact this could have. As such, we’re likely to see GBP/USD rates remain close to the three-month low they were trading at last week in the short-term.
Looking ahead and it’s a fairly sparse week for UK economic data releases, with Wednesday’s speech by BoE governor Bailey and Friday’s Markit Services PMI figures likely to be the main focus for those clients holding GBP positions.