Pound Euro + GBP/USD Exchange Rates Soft at Start of New Week, EUR/USD Remains Unchanged

A look at the forex markets showed the pound to dollar exchange rate fell by 0.35 pct on a day-to-day basis to reach 1.2628 at the close.

The pound to euro exchange rate (GBP-EUR) traded 0.13 pct lower to hit 1.2628. This marked the second consecutive day of declines for the rate.

Elsewhere, GBP/AUD went down half a percent to 1.8193, GBP/CAD went lower 0.6 pct to attain 1.8308.

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Why is the GBP lower at present?

The frustrating thing for those with an interest in a strong pound sterling is that there is no apparent reason for the decline of GBP on Friday afternoon.

There is no major newsflow that can be attributed to the moves and we would suggest there are some 'grey forces' in the market pushing sterling lower.

"No headlines I can see for the move and it’s a bit early for profit taking ahead of the weekend of possible risk," says a note from ForexLive.

This could be the squaring of positions by major institutions or unexpected corporate demand.

Either way the moves are signficant in that they will be triggering stop-losses in the market - as these are hit a cascading effect takes hold and the move gathers momentum.

"Banks reporting A few stops going through in Cable as stale longs finally succumb to "end-of-the-week" profit taking," says Steve Collins at London & Capital Asset Management.

The week's outlook

A morning currency note to forex clients from Lloyds Bank Research offers further insights:

"GBP had been trading with a mildly corrective tone last week. That was helped by the paring back of rate hike expectations following the weaker earnings data, which provided further evidence that despite the jump in the June CPI, underlying inflationary pressures in the UK economy remain benign. There are a number of key releases from the UK this week, which will determine the tone for GBP.

"BoE MPC minutes, retail sales and the first estimate of Q2 GDP provide plenty of potential to move GBP. IMM data shows GBP long positions declined further in the week to 15 July, and the break lower in GBP/USD on Friday will likely have triggered further squaring of GBP longs. With GBP long positioning now a lot lighter, GBP will probably be more sensitive to positive data surprises than before. However, a lack of positive surprises will likely see the mild corrective bias in GBP persist."

The important thing to note here is that there is no fundamental reason for the move, thus we would suggest the dip will ultimately be short-lived.

Nevertheless, it will have played havoc on the accounts of many traders hoping for a volatile free close to the week.

Elsewhere, the U.S. dollar index was largely steady overnight with investors’ focus still squarely on geopolitics.

News of a downed Malaysian passenger plane over Ukraine and Israel’s ground incursion into Gaza sent riskier assets tumbling and investors fleeing to traditional safe harbours.

The yen and the Swiss franc outperformed in yesterday’s session, but gave up some gains overnight. With so much focus on U.S. bond yields, the flight to safety into Treasury bonds pushed yields lower and pressured the dollar.