Pound Recovers Lost Ground From U.S. Dollar and Tops 2023 High Vs Euro

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The Pound recovered lost ground from a broadly softer U.S. Dollar in the opening session of a holiday-shortened week and reached some of its best levels against the Euro since December amid broad gains across the government bond complex.

Sterling advanced strongly against the U.S. Dollar, Swedish Krona and the 'Dollar bloc' group on Tuesday as European and North American financial markets reopened following a Monday public holiday. 

"GBPUSD trades well after building a nice base down near 1.2300," says Brent Donnelly, President at Spectra Markets and veteran currency trader with a career spent between hedge funds and a range of global banks. 

"The other interesting development is that the MOF seems to have lowered its pain threshold on USDJPY," he adds in Tuesday's am/FX daily macro diary.

Above: Interbank reference rates for selected Sterling pairs. Source: Netdania Markets. 

Gains were much more limited in relation to the Japanese Yen, Norwegian Krone and Euro, however, while the sharpest moves followed reported remarks from Japan's vice finance minister for international affairs Masato Kanda.

"We will closely watch currency market moves and respond appropriately as needed," he said, according to a Reuters report. "If necessary we won't rule out any options available."

The Yen had previously fallen to some of its weakest levels since October and a period in which the Federal Reserve (Fed) monetary policy stance was at its most hawkish and perilous for the Japanese currency.

Above: Pound to Dollar rate shown at 15-minute intervals alongside upside-down USD/JPY. Click for closer inspection. 

"I think if we push into 145.00 then we will hear or even see them in the market. I don't think we will push that high, but we might if the US is forced to throw in more than 1 more hike," says Brad Bechtel, global head of FX at Jefferies. 

There was at least one official intervention to support the currency late last year and numerous verbal interventions, which often led to gains for non-Dollar currencies and were sometimes followed by large increases in interbank turnover of Japanese Yen.

Sterling's rally on Tuesday also came as the UK government bond market stabilised following the heavy selling seen in the wake of last week's stronger-than-expected inflation figures, however, with price action helping GBP/EUR rise above an important resistance level on the charts.

Above: Pound to Euro rate shown at weekly intervals with Fibonacci retracements of 2022 fall indicating possible areas of technical resistance for Sterling while selected moving averages denote prospective support and/or resistance.

"Money markets now price 100bp of Bank of England tightening by November. This would put the Bank Rate at 5.50%. Our team's view is that such an amount of tightening is highly unlikely," says Chris Turner, global head of markets and regional head of research for UK & CEE at ING.

"However, UK data is doing the most of the talking and it will probably be the jobs/wages data (13 June) or the May CPI data (21 June) which will be the key determinant on whether the market reins in aggressive tightening expectations," Turner writes in a Monday market commentary.

Government bond markets rose as yields fell amid widespread signs of risk aversion in other financial markets on Tuesday when many stock indices were quoted lower alongside the price of crude oil and many other commodities, 

Above: Selected global market quotes and performances. Source: Netdania Markets. 

Gold prices were higher alongside those of some industrial metals contracts as many analysts looked ahead to congressional votes in Washington after an agreement was reached at weekend to raise the U.S. government debt ceiling

"There is still some uncertainty as to what the bipartisan coalition to pass the bill on the floor will look like, and of course – that will depend entirely on the final language of the bill," says Bipan Rai, North American head of FX strategy at CIBC Capital Markets.

"An early sign of trouble is if there’s complications getting the bill itself out of the committee today. The House vote on the debt ceiling bill could be Wednesday afternoon to the early evening," Rai writes in Tuesday market commentary.  

Tuesday's price action also came after Spanish inflation fell further than was expected for the month of April and barely a day out from the release of inflation figures from Germany and the wider Euro Area, which will be important determinants of the outlook for European Central Bank (ECB) interest rates.