May 19, 2022
  • May 19, 2022

Fragile confidence in UK outlook dominates pound against euro and US dollar

By on April 12, 2022 0

Soaring US yields continue to dominate FX, with CPI data crucial for near-term guidance

The evolution of US bond yields will remain a key factor for currency markets. The surge in yields continued on Monday, boosting the dollar and also hurting stocks.

The near-term focus will be on US inflation data and it is certain that the headline rate will rise to a new 40-year high.

Very strong data can be taken into account, however, and an overall rate below the consensus forecast of 8.4% will provide some relief. Market reaction will be watched closely for evidence on overall market positioning.

Developments in Ukraine will also be watched very closely and pressure for a more aggressive Western response will intensify if the use of chemical weapons is confirmed with the euro vulnerable.

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British Pound and US Dollar Exchange Rate Outlook

The exchange rate between the pound and the dollar (GBP/USD) found support below the 1.3000 level on Monday, but attempts to rally made little headway.

Overall confidence in the UK’s outlook remained fragile at best given the pressure on real incomes and soaring energy costs.

The weaker release of UK GDP data and a decline in BRC retail sales reinforced reservations about the outlook.

Labor market data was close to expectations, but GBP/USD failed to advance and held just above 1.3000.

Weaker US inflation would bring some relief to GBP/USD, but a sustained recovery is unlikely at this stage.

Euro (EUR) exchange rate today

The euro overall struggled for support on Monday with further reservations about the underlying outlook.

Politically, there were reservations about the French presidential election and Ukrainian concerns were also an important element, especially given some reports of chemical weapons in Mariupol.

The euro to dollar (EUR/USD) exchange rate hit sell interest on the rallies and fell to 1.0865 on Tuesday.

Fundamentals will put further pressure on the Euro with selling on rallies, although a short hedge ahead of Thursday’s ECB policy meeting may provide some relief.

US Dollar (USD) Exchange Rate Outlook

Trends in US bond yields continued to have a big impact on exchange rates, with surging yields undermining support for the yen and boosting the dollar with the trade-weighted index at the highest level since May 2020.

The exchange rate of the dollar against the yen (USD/JPY) reached 6-year highs around 125.75 before a limited correction.

Japanese Finance Minister Suzuki said excessive currency volatility and disorderly currency movements could have negative effects on the economy and financial stability.

The rhetoric briefly dampened selling, but overall yen sentiment remained particularly weak with USD/JPY strengthening again to 125.70 on Tuesday.

Crédit Agricole expressed some reservations about the possibility of further yen selling after Suzuki’s comments; “Such fears could also keep FX markets on high alert for more verbal interventions to stabilize the beleaguered JPY.

He added; “Additionally, our positioning model signals that the JPY has been oversold for three weeks, the JPY REER has slipped to a 50-year low and our long-term fair value model suggests that the JPY is the cheapest currency in the world. G10 right now. (e.g. around 18% undervalued).”

Other currencies

The Japanese yen was subject to further sell-off on Monday as soaring US yields dominated global currency markets.

The exchange rate between the pound and the yen (GBP/JPY) posted a two-week high around 163.80 before a correction limited to around 163.50.

On the other hand, the Swiss franc maintained a strong tone, with the pound/franc exchange rate (GBP/CHF) falling back to a one-week low around 1.2120.

Commodity currencies were again hampered by reservations about the global outlook as well as rising US yields.

The exchange rate between the pound sterling and the Australian dollar (GBP/AUD) posted a two-week high at 1.7580 before falling back to 1.7520 as the Australian currency rallied.

A drop in oil prices also hampered the Canadian dollar, with the exchange rate between the pound and the Canadian dollar (GBP/CAD) posting a two-week high at 1.6475 before a limited correction.

The day to come

Tuesday’s key data will be the last release of US consumer prices and there will be a big impact on bond yields.

According to the consensus forecast, the headline rate will rise to a new 40-year high of 8.4% from 7.9% previously, while the base rate is expected to rise to 6.6% from 6.4% and also the rate the highest since 1982.

Stronger-than-expected data would add pressure for much more aggressive Fed tightening and undermine equities.

The Reserve Bank of New Zealand (RBNZ) will announce its latest interest rate decision on Wednesday local time, with a consensus forecast that there will be a further hike from 0.25% to 1.25%, but with speculation of a 0.50% rise with sharp moves in the kiwi inevitable.

The evolution of the coronavirus in China will also continue to be closely watched given the strain on global supply chains and inflation.