Pound Catches a Break on Stock Market 'Relief' Rebound, Gains Could be Fleeting

Image © Adobe Images

A midweek recovery in global stock markets signals an easing in investor pessimism that has also benefited the risk sensitive Pound Sterling, but all signs point to any gains being short-lived. 

This is a 'risk-on / risk-off' market regime which offers only binary outcomes for the Pound: it tends to rise when equity markets are rising but fall when fear takes hold.

A snapshot of the equity dashboard at IG shows all the main indices are in the blue:

There is no clear trigger for the gains and they therefore look to be a mechanical relief response to the unusually selling over recent days.

"You get the feeling that today’s rebound is just driven by bargain hunting and short-covering more than anything," says Fawad Razaqzada, Market Analyst at Forex.com.

Nevertheless, a look at Pound Sterling's performance on the day also reveals an improvement for holders of Sterling when compared to the first two days of the week.

The Pound to Euro exchange rate is up a third of a percent at 1.1862, although the Pound to Dollar exchange rate is only up marginally at 1.2587. (Set your FX rate alert here).

A look at the GBP dashboard shows gains coming against most G10 majors, with the AUD being a standout performer following some hot inflation readings out of Australia earlier in the day:

The outlook for the Pound therefore rests heavily on what the general market does: sentiment is poor at present and rallies are likely to be viewed with suspicion, as such relief could be fleeting.

"A sense of panic crept back into stock markets on Tuesday. The Nasdaq Composite lost almost 4% as investors slashed their exposure to riskier assets, stressed about a slowdown in economic growth and corporate earnings that could be compounded by a meteoric rise in interest rates," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.

The Pound fell back below €1.19 and $1.36 in a punishing day, confirming the pound is traditionally heavily punished during times of elevated market stresses.

"Appetite on risk will continue to dictate appetite for sterling in a week absent of data flows," says Thanim Islam, Market Strategist at Equals Money.

It is too soon to call an end to the current market selloff and therefore the overall trend in most Pound exchange rates remains vulnerable to further weakness.

"Downside risks prevail in the near term, in waiting for the BoE meeting on 5 May to shed further light," says Asmara Jamaleh, an economist at Intesa Sanpaolo.

Analyst George Vessey at Western Union Business Solutions points out the pound is currently the second-worst performing major currency in 2022, down over 7% versus the dollar, trailing only the Japanese yen’s 10% fall.

He says Monday was the first weekly open beneath $1.30 since October 2020 and this week the pound has sunk over another 2% already.

"Nothing is certain when it comes to FX trends, but the convincing breakout below the key $1.30 level for GBP/USD last Friday has brought the $1.20-$1.25 range firmly back into view. Diminishing expectations for UK rate hikes combined with increasing geopolitical risk are weighing heavy," says Vessey.

What is driving the deterioration in sentiment?

Today sees Crédit Agricole update clients with news their Risk Index has, after several weeks of stability, started moving back higher.

There are several sources of growing investor angst," says David Forrester, Senior FX Strategist at Crédit Agricole:

(1) "FOMC rate hike expectations are growing as the central bank’s next meeting approaches and Committee members sound increasingly hawkish;

(2) "as the US earnings season progresses, some big technology stock names are missing investor expectations to the downside;

(3) "energy supply tensions are ramping up in the EU with Russia cutting Poland and Bulgaria off from gas supplies, a warning shot to other EU countries that refuse to pay for gas in RUB; and

(4) "growing concerns about China’s growth as Covid lockdowns spread."