Rising risk appetite dominates exchange rates, BoE’s dovish rhetoric limits sterling’s overall gains

  • BoE doves always fly
  • UK economy bookings persist
  • Yen slips amid increased risk appetite

Rising risk appetite dominates exchange rates, BoE’s dovish rhetoric limits sterling’s overall gains

Markets put aside fears of soaring energy costs on Thursday with a surge in equities and renewed demand for risky assets that helped support the pound.

Commodity currencies posted strong gains and the Japanese yen fell sharply in global markets.

The exchange rate of the British Pound against the Yen (GBP / JPY) hit 32 month highs and a strong risk appetite provided some support for the British Pound. Britain’s currency as a whole, however, was hampered by conciliatory rhetoric from Bank of England members Tenreyro and Mann, which limited the scope of support for the pound.

The British pound-dollar exchange rate (GBP / USD) retreated from three-week highs at 1.3735 to trade below 1.3700, but regained that level on Friday. The pound / dollar exchange rate (GBP / EUR) failed to maintain its 2-month highs near 1.1830, but consolidated above 1.1800 on Friday.

BoE doves always fly

bannerBank of England MPC member Tenreyro said inflation should be temporary and she also warned that an interest rate hike to tackle one-off price increases would be doomed to fail. . The comments suggested that Tenreyro would be reluctant to support any short-term move to raise rates unless there is much clearer evidence of a sustained rise in inflation.

Recently appointed member Mann also said the central bank may delay rate hikes because money markets have already risen.

Evidence of notable splits in the Monetary Policy Committee is expected to remain a major concern in the market, with rhetoric from key officials being watched very closely in the near term.

Crédit Agricole has maintained a cautious position; “We reiterate our warning that UK money markets have gotten ahead of themselves taking into account an aggressive BoE tightening cycle to start soon, as any reversal could in turn weigh on the GBP. “

ING added; “Beyond today’s price development, we still believe that the British pound may have to give up some of its recent gains as our economist expects the BoE to fail to respond to monetary tightening. “

UK economy bookings persist

Overall confidence in the UK outlook is still fragile among investment banks, especially with significant structural concerns and fears that Brexit will amplify the difficulties on the supply side.

Commerzbank strategist Ulrich Leuchtmann took a particularly pessimistic stance in arguing this; “The British Prime Minister was so often wrong in Brexit negotiations that a dogged British stance only entails additional political and economic risks. This makes a stronger pound impossible, despite rapid rate hikes. the Bank of England. ” He added that; “Sterling could not trace the losses recorded in September”.

ING also expressed some reservations; “We also note that the pound seems somewhat complacent in the face of new friction between the EU and the UK and the fairly significant risk that the bloc will impose retaliatory trade measures if the UK unilaterally suspends parts of the protocol. of Northern Ireland. ”

There are expected to be further comments on Friday with a meeting scheduled between UK Brexit Minister Frost and European Commission Vice President Sefcovic.

MUFG expects some net sterling relief; “Without a doubt, this EU proposal appears to have removed the short-term prospect of an escalation that could have fueled the impending sale of the pound in the markets.”

Yen slips amid increased risk appetite

Markets are still worried about soaring global energy prices, but there was strong demand for reflation trading on Thursday with stocks advancing noticeably.

Chris Weston, head of research at broker Pepperstone noted; “We are ending the week with soaring risks, stocks are skyrocketing and the JPY has no place as a hedge as this would only dampen the overall performance of the portfolio.”

Marshall Gittler, Head of Investment Research at BDSwiss Group, added; “The JPY was the biggest loser. This is the global inflation outlier and is therefore likely to be the global monetary policy normalization outlier as well. “

GBP / JPY posted a 32-month high at 136.0.

Robust risk conditions also provided net support to the pound sterling.

Commerzbank expects GBP / USD to struggle to break through 1.3730 / 50; “We think he might be trying to recover, but Elliott’s intraday wave count is negative, so we’re going on the sidelines today.”

Credit Suisse notes that the EUR / GBP cross is close to key support; “As we would look again for a new hold at 0.8449 / 37 and hover higher in the channel, a sustained move below 0.8437 would mark an acceleration of the downtrend, then exposing the main lows of 2019 and 2020 at 0.8281 / 39. ” (close to for GBP / EUR).

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