Pound Sterling's 2-Week Rally Fired by Returning Investor Confidence Returns
- GBP up alongside global stocks
- Optimism to be tested by start of U.S. earnings season
- Strong start to week owing to news on PM Johnson's recovery
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- Spot GBP/EUR rate at time of writing: 1.1475
- Bank transfer rates (indicative): 1.1180-1.1260
- FX specialist rates (indicative): 1.1300-1.1380 >> More information
- Spot GBP/USD rate at time of writing: 1.2600
- Bank transfer rates (indicative): 1.2220-1.2311
- FX specialist rates (indicative): 1.2440-1.2450 >> More information
The British Pound gained against the Euro, U.S. Dollar and a number of other major currencies on Tuesday amidst an ongoing return of positive investor sentiment, and analysts say the rally could extend provided the current mood of optimism continues.
A cocktail of declining coronavirus infections, plateauing death rates and news that a number of European nations are easing strict lockdowns have created an air of optimism that saw an appetite for risk amongst traders return. The Pound tends to gain in times of improving investor optimism and with world markets trading in the blue, it is understandable that the UK currency is advancing.
The Pound-to-Euro exchange rate is quoted at 1.1485, taking the gains of the past month to 4.75%, the Pound-to-Dollar exchange rate is trading at 1.2570, up 4.2% over the course of the past month.
"Sterling notched one-month highs as risk appetite improved, quenching for now investor appetite for safety in the U.S. Dollar. A dearth of U.K. data this week has led the Pound to take its cues from global developments. A subsiding of U.K. political risk with Boris Johnson out of the hospital and on the mend translated into added traction for the pound’s recovery from recent 35-year lows," says Joe Manimbo at Western Union.
Above: GBP/EUR correlation with the U.S. S&P 500 confirms Sterling to be a 'risk on' asset
The Dollar's declines are a clear indication that investors are turning bullish once more, believing that the worst of the coronavirus crisis has come to pass amidst increasing signs that many Western economies are readying to lift lockdown restrictions.
France on Sunday extended its lockdown but set out a roadmap for an exit while on Monday Spanish and Italian businesses were returning to normal.
In the U.S., the death toll meanwhile appears to have stabilised and President Donald Trump has indicated the lifespan of existing lockdown measures to halt the spread of the coronavirus is limited.
"Fed programs to improve USD liquidity, higher oil prices, a slowing in new coronavirus cases and better than expected Chinese trade data for March all supported commodity currencies such as AUD, NZD and CAD. We expect the extra liquidity programs by the Fed to further weaken the USD this week," says Kim Mundy, Foreign Exchange Strategist at CBA.
With the Pound's fortunes so closely tied to the fortunes of overall financial market sentiment, we believe this week will be crucial to determining whether the current improvement can be sustained. Major U.S. corporations will start reporting their quarterly performances, which should give a steer to investors as to how deep the economic contraction will be.
U.S. banks JPMorgan Chase and Wells Fargo kicked off the earnings season on Tuesday, with JPMorgan Chase saying first-quarter profit fell 69% to the lowest in more than six years as credit costs surged, giving investors a first glimpse at the extent of the damage Covid-19 is wreaking on bank results.
The company set aside $8.29BN for bad loans, the biggest provision in at least a decade and more than double what some analysts expected.
Wells Fargo meanwhile set aside $4BN in loan-loss provisions in the first quarter, almost five times what it allocated a year ago and the most in a decade.
That contributed to an 89% drop in net income.
Despite the negative signals the two banks sent the investor community, markets continued to march higher with investors thus far refusing to be anything but optimistic.
"There is a huge test to that level of optimism coming this week in the form of the latest round of earnings figures from some of the world’s largest companies who will have to lay bare just how badly affected they have been. While most headlines will focus on the quarter-on-quarter falls in earnings and profit, the crucial numbers that we will be looking for is guidance on when companies can get back to full strength and whether they have seen an impact from national support programmes," says Jeremy Thomson-Cook, Chief Economist at Equals.
The current belief is that the Federal Reserve and U.S. Government have done enough to provide a cushion to the blow of the coronavirus shutdown, but the outcome of this week's reporting round could well shift sentiment.
For those watching Sterling the outlook rests with whether this optimism can continue, or do further earnings results expose the market to have wildly inflated valuations heading into a sharp recession?
Any adjustment in attitude that sees stock markets fall and sentiment dip could well see Sterling reverse its recent gains.
"We expect GBP to weaken further, with GBP/USD having topped out at 1.25. GBP strength versus EUR is also limited now, having retraced half of the prior rally and failed to break materially below the 0.8730 area. The UK has the largest current account deficit in the G10 and a large financial sector which has USD funding needs, suggesting that it is vulnerable to weakness in an environment of market volatility. GBP/USD also tends to follow oil prices, where the outlook remains unfavourable. The BoE's balance sheet is expected to expand over the coming months, keeping GBP weak," says Hans Redeker, Strategist at Morgan Stanley.
Johnson Overcomes Coronavirus, News Aids Sterling to 1-Month Best Against Euro and Dollar
12/04/2020. London, United Kingdom. Prime Minister Boris Johnson thanks the NHS in a video message on Easter Sunday. 10 Downing Street. Picture by Pippa Fowles / No 10 Downing Street
The British Pound rose half a percent to record its highest levels in a month against the Euro and U.S. Dollar at the start of a holiday-shortened week in the UK, a move that coincided with positive domestic news concerning the health of Prime Minister Boris Johnson.
Johnson was over the weekend released from St. Thomas Hospital in London owing to a successful treatment for his Covid-19 infection that at one stage saw his odds of surviving down to 50-50.
Markets had last week took note of news of the worsening in Johnson's health, with the Pound losing ground on Tuesday night when it was announced the Prime Minister had been admitted to the hospital's ICU unit.
Johnson's serious condition last week injected a fresh dose of uncertainty into the UK's political-economic matrix, and as recent years have shown the Pound tends to respond poorly to such uncertainty. Therefore, news that the country's leader has been released from hospital to recuperate at his Chequers residence will likely impart some support to the Pound's valuation.
"Sterling rose to one-month highs in light holiday trade. Underlying sentiment toward the pound brightened on news that U.K. Prime Minister Boris Johnson was well enough to leave the hospital over the weekend. While Mr. Johnson recovers from the coronavirus, attention for sterling shifts back to global risk sentiment and domestic data which is sparse this week," says Joe Manimbo, an analyst at Western Union.
The Pound reached a high against the Euro at €1.1447 on Monday, which is over half a percent higher than where it started the week. The Pound posted a high against the Dollar at $1.2533, which was a 0.45% advance.
The Pound's gains represent an extension of the positive momentum that came after the U.S. Federal Reserve increased liquidity lines to global central banks aimed at ending a global shortage of dollars.
A sudden surge in demand for cash during the coronavirus-inspired market meltdown in the first half of March appears to have placed significant pressure on the UK's financial services industry.
However, by providing direct liquidity to global central banks through the creation of swap lines, the Fed soon eased this pressure, which in turn appears to have fuelled a recovery in the Pound.
"We continue to see upside potential for Sterling. Despite its relative liquidity, the Pound was one of the G10 currencies most harshly punished by the dollar funding squeeze, possibly due to the UK’s large financial sector. As this issue seems to have been resolved, we expect Sterling to regain its lost ground by mid-year," says Gaétan Peroux, a Strategist at UBS.
