Just too good to be true? Can’t take my eyes off of EU(R).
Amongst the winners of the pandemic have been Gold, the Euro and increasingly the Pound Sterling. Sure, the first two have reached their highest rates in one case ever and in the other for several years but for the Pound to have eliminated all of its losses for the year against a backdrop of increasing political and economic uncertainty is either impressive or insane. Strong risk appetite across markets is contributing to fears of a dissonance between valuations and fundamentals. The clash between reality and financial markets is emphasised as we reflect upon the global stock market’s performance. With the world’s equities having enjoyed their best month since 1986, we ask is this just a very steep V-shaped recovery or a market running before it walks again.
In the case of the Pound there is reason to have caution over its impressive rise. Despite a rising spot price since the first few weeks of the pandemic, speculative positioning has remained largely static with a severe short bias. This means that periods of market turbulence and in particular GBP-positive remarks or data can have a bigger punch than normal as investors are squeezed out of this short position. Whilst this effect can push Sterling considerably higher it can also encourage higher volatility and create choppy GBP conditions.
Whilst we await the data to confirm the change in positioning, we have seen this effect take place last week. On Friday Bank of England Governor Andrew Bailey took his opportunity to speak at the virtual Jackson Hole symposium. The take away message of his speech was that the Bank of England has considerably more firepower left in terms of its monetary policy toolkit than either the market or the Bank appeared to have believed. This leaves us with a mixed conclusion: either the Bank is suggesting it can and therefore perhaps will target looser monetary policy to encourage growth, or, the bank is comfortable in its capacity to deal with an economic downturn should a second wave of the virus his the economy. Both are credible interpretations of the Governor’s comments but the market’s short exposure to Sterling likely encouraged defensive positioning with demand for the Pound rising on the day.
The momentum behind the Pound continued over the bank holiday with thin liquidity in markets. With infection rates rising across Europe, the deadline for a Brexit deal and the US election creeping ever closer markets might conclude that valuations have gone too far too soon and stage a correction in these assets.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
A different Euro-vision A late start to monetary tightening versus the rest of the world could deliver the some-what illusive stronger Euro to markets. A delay to hike rates in Europe has left the ECB playing catch up, with interest rates lagging noticeably behind their peers. Since its inception over 20 years ago, the Eurozone […]
European Central Bank Yesterday the ECB duly raised its interest rates by 25bps. President Lagarde maintained that the ECB was on a journey and had not yet arrived-some would, given that ECB inflation is not dropping and is stuck at 6.9%, interpret that analogy as being their firm intention to continue to raise rates given […]
US Government Default on June 1 without a hike in the Debt Ceiling Markets (so far) are remarkably sanguine about this appalling scenario for the US and therefore the global economy. President Biden and the Republican House Speaker have not discussed this issue since February-and the Speaker is currently in Jerusalem so unable to meet […]