A reason to rally
GBPUSD yesterday surpassed recent highs. Of course, the main driver of this move has been the prospective of a positive yield differential in favour of GBP between the two currencies thanks to the outsized Fed cut and subsequent BoE hold. This move has been so significant that as of yesterday, within overnight cable points, there is no longer a premium for the lender of the US Dollar over the Pound. Despite that, we saw a significant correction lower in GBP at the European open yesterday. Some of this move could be written off as a reaction to early morning European data that you could argue limited risk appetite which will ordinarily serve to undermine GBP.
Whilst general risk sentiment will no doubt be a key feature supporting any GBP rally, it is also clear that Sterling at this level is rather unstable without ongoing stimulus. With GBPEUR now clearing 1.20 on the offer yesterday, it will be good news for Sterling sellers that this stimulus may be on its way. Overnight a combined monetary and political effort to invigorate the Chinese economy was unveiled. The Chinese economy and its recent beleaguered growth rate has impacted global risk sentiment and in turn the valuations countless global assets. The combined measures to reduce reserve requirements at banks, cutting key benchmark interest rates as well as creating new direct lending facilities to support investment could be China’s Mario Draghi moment.
So far overnight the Dollar’s decline has extended with regional stocks across Asia rallying on the news. Ordinarily you would fairly expect such trends to continue today across international markets. The measures taken will have a global significance as a result of the expected tailwind to restore growth and consumption. The PBOC’s actions are mindful to the property sector also which should in turn promote consumption and importation trends that will have greater spillovers into macro-FX.
Discussion and Analysis by Charles Porter
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