The pound sterling forecast has continued to rebound off some of the more recent lows rising to 1.1095 so far today on the GBPEUR interbank rate, and 1.2505 on the GBPUSD interbank rate. Such levels seemed very distant only a few days ago when fresh lows of 1.09 on GBPEUR and 1.2256 GBPUSD were confirming the fears and expectations that sterling was not performing well.
Whether this recovery is the beginning of a fresh spike or a taking of profits by investors, following many weeks of decline for sterling is still unclear. GBPEUR interbank rates had been as high as 1.15 at the end of April and over 1.28 in early June.
It would not be surprising for the fundamental reasons for sterling weakness to remain in place, that being a direction of travel on Brexit that indicates a no-deal, and the poor state of the UK economy as a result of the health and economic effects of COVID-19.
However, markets do not always follow guaranteed paths, since they are merely a reflection of investors attitudes and sentiments. As we have seen in the last 72 hours, the sentiments which were pulling the pound down seemingly in one direction, have to an extent reversed as sterling finds support. This highlights the danger of holding on, hoping exchange rates will just continuously go in your favour, whichever direction it is that you wish for it to go.
Perception is Vital in the currency Markets, is the UK Headed for a V-shaped Recovery?
Sometimes in the market when all the news continues to be quite negative, further negative news of a similar nature doesn’t necessarily continue to trigger worse moves. We know the UK might be headed for no-deal and we know that the UK economy is a poor state. Further bad news here can therefore be taken for granted and might start to lose its weight as the market looks for other more interesting news.
In the words of Aldous Huxley, ‘There are things known and there are things unknown, and in between are the doors of perception’. This tells us a little about how we can look at events in different lights, as the markets may sometimes do, and it can change the outlook for a currency.
So for sterling, the recent comments this week from the Bank of England Chief Economist Andy Haldane, that he was seeing evidence of a ‘V-shaped’ recovery, was some perhaps surprising good news that might have helped to trigger a little more optimism.
It can be argued that the FX markets have been pricing in the possibility of the Bank of England extending their QE (Quantitative Easing program) or considering negative interest rates. The comments from Mr Haldane on Tuesday perhaps make this slightly less likely. Andy Haldane also was the only dissenter at the last Bank of England interest rate decision where he indicated he didn’t feel more stimulus was necessary.
With the perception for the pound having been so poor for many weeks now, so much so that Reuters reported that number of best against sterling rose to their highest since November in June, the argument would go that any signs now perhaps things are not as bad as the initial thoughts, could lead to the pound surprising many and recovering some of the more recent losses in the short term.
What Other News is Coming up to Move the Pound and Currency Markets For the Rest of This Week?
For today, we have the latest Construction data for the UK at 09.30 am, before Eurozone Unemployment at 10 am and then one of the most key releases of the month, the US Non-Farm Payroll data for the US. The US Unemployment numbers released at the same time might also be vital for not just the US Dollar, but also the Australian and New Zealand dollars amongst others, as the possible swings in global sentiment triggered by the news help to shape global attitudes on risk, thereby influencing a wide range of currencies.
If you are selling the Australian dollar for the pound, you might want some positive US economic news, to help encourage global confidence which would typically help the Aussie dollar to rise in value.
Tomorrow is the latest UK Services data, a key release for the UK economy at 09.30 am. This will provide the latest snapshot of the largest contributor to UK growth, estimated to account for around 80% of the UK economy.
Such data will be crucial in determining not only whether Andy Haldane is correct in his estimations of the UK economy ahead, but also whether the pound is likely to be able to continue this current run of form, or whether it will ultimately be remaining a poor performer in the market’s eyes. As quoted above, it is all about the perception and how this ‘known’ information will support the perception of the ‘unknowns’.
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