A focus on Sterling – GBP/USD and EUR/GBP

What’s going on in the FX markets?

The currency markets remain in a tricky environment, as we move from one risk event to the next, desperately trying to find some insight and direction. We highlighted at the beginning of the year that the financial markets were putting themselves in a dangerous position, as they attempted to predict the timing of the first interest rate cuts by the major global central banks. The financial markets had the first interest rate cut priced in by the US Federal Reserve for March of this year and had positioned themselves in the currency markets and Fix Income markets accordingly. The markets have got this spectacularly wrong and it now looks more likely to be May if at all then. This has led to choppy, directionless markets, with the Dollar experiencing large periods of strength – very much against what the markets were looking for going into this year.

Despite the dominance of the Dollar so far this year, GBP/USD has held up relatively well towards the upper half of its previous 12 month range. Sterling crosses – so the likes of GBP/EUR, GBP/CHF, GBP/JPY have all fared very well so far this year, with GBP/EUR up towards the upper end of its 18 month range.

Last week’s slew of UK economic data was meant to set the scene for a higher Pound across the board, however it ended up painting a very mixed picture of the economy, with both the inflation and GDP figures coming in weak and activity data registering beats. Looking through it all though, the data suggested that the macro backdrop is evolving quite well for the UK and the markets are looking for the first interest cut in the UK in August now. This would mean that the UK would be one of the last G10 central banks to cut interest rates.

With this in mind, the Pound should fare well against its G10 counterparts and we do feel GBP/USD will perform well in the coming weeks.

EUR/GBP has one again bounced off this huge support at 0.8500 and cannot seem to muster up enough momentum to break through this line and continue its trend lower – see chart below –

Chart of the Day – EUR/GBP – 0.8500 remains the 18 month low in EUR/GPB – see red line on chart – we have failed to break and close below this line and have subsequently bounced back above 0.8550 this week.