Pound Sterling Rises Despite Manchester Attacks - Here is Why

The British Pound was seen recovering against the Euro and US Dollar over the course of what has been a traumatic day for many of the citizens of the United Kingdom.

Twenty-two people, including a child of 8, have been killed and 59 injured after a suicide bomber carried out an attack at Manchester Arena.

Despite the horror the market impact of the the attack has been limited with Pound Sterling maintaining values well within recent ranges and trends. In fact the currency has recovered through the course of the day.

The GBP/EUR exchange rate put in the most impressive performance having risen to a high at 1.1600 after being seen as low as 1.1526 earlier in the day. 

Meanwhile, the GBP/USD exchange rate managed to move back above 1.30 again to record a high at 1.3024, having been as low as 1.2951 in the day.

"The market took a favorable turn for Pound buyers Tuesday as Sterling moved a penny below recent eight-month highs. Sterling is showing some fatigue after racing to September highs last week," says Joe Manimbo, an analyst with financial payments provider Western Union.

Why was the Pound apparently immune to the events?

"Financial markets have become less and less reactive to one-off terrorist incidents in recent years, however there has still been a mild safe haven preference in response. Sterling has dropped slightly," says Richard Perry, an analyst with Hantec Markets.

The currency has been under pressure of late and the softness we are seeing in the currency is therefore more likely an extension of this trend than anything else, so beware click-bait headlines from the tabloids that would make misleading linkages between the currency and the event.

“News of a possible terror attack in Manchester reached markets just before trading started in Asia, but stock markets have been stable overnight. The volatility index VIX has continued to slide after last weeks spike and are down below 11 points. In the FX market there has been some demand for safe-haven currencies, but small moves since Monday morning,” says Marit Øwre-Johnsen at DNB Bank ASA.

Election Campaign Halted, Relief for the Pound?

The event has however seen campaigning for the upcoming general election cease which should take away an element of uncertainty in the British Pound exchange rate complex.

Recall that the Pound has recently seen a premium being priced in over news that the Conservative party has seen its lead against Labour drop.

Any kind of unity between the parties, or movement back to the Conservatives amongst voters, could benefit Sterling but this dynamic is looking a little simplistic.

"Inadvertently, the tragic events may place a greater spotlight on the elections – at least from an FX market perspective, which had been all but priced for a strong Tory win. In the options market, 1M GBP risks reversals have moved a bit on the overnight news and we could well see the cost of GBP downside protection picking up from this low base in the run-in to GE2017," says analyst Viraj Patel at ING.

However, Patel says he expects the Pound to lose further ground as the fundamentals underpining the currency remain questionable:

"We continue to cite greater two-way risks to GBP crosses; while GBP/USD remains range bound (due to a soft USD), GBP has been a laggard within the European FX space over May – highlighting its bearish fundamentals."

At the time of writing the Pound to Euro exchange rate is trading at 1.1552 and the Pound to Dollar exchange rate at 1.2969.

Concerning the outlook for Sterling in the remainder of the day, the main event will be the appearance of Mark Carney and other decision-makers before the Treasury Select Committee.

The Bank of England team traditionally face a grilling from members of the UK parliament following the publication of their quarterly Inflation Report.

"The inflation report hearings are the main event, and with the latest CPI reading hitting 2.7%, Mark Carney and co. can expect a grilling about if, when and how they are coming to combat the country’s rapidly rising prices," says Connor Campbell at Spreadex.

Any surprises from Carney concerning their intentions to raise or lower interest rates could well impact the price of Sterling but we would expect it to be limited in duration.

Indeed, Carney and his team are canny customers and well seasoned in sticking to the script despite the sometimes-hostile reception they get before lawmakers.

Euro on a Tear Higher

The real driver of foreign exchange markets at present is the Euro which has come into favour with global investors in a big way of late.

The Euro is charging higher again thanks to two sets of impressive Eurozone economic statistics released today.

Data from IHS Markit showed that firms are seeing business expand at its strongest pace in six years, giving rise to expectations for a strong quarter for the Eurozone economy.

The composite PMI for May - a broad-based assessment of the business activity of Eurozone firms - read at 56.8, analysts had forecast a reading of 56.6.

“Capacity is being strained by the strength of demand, with backlogs of work showing one of the largest increases in the past six years. Job creation has surged to the second-highest rate in nearly a decade as firms seek to expand capacity and meet rising demand,” says Chris Williamson, Chief Business Economist at IHS Markit.

Meanwhile, data out from Germany was equally impressive.

The Ifo index rose further from 113.0 to 114.6 (Consensus: 113.1), this is a record high since the index was started in 1991 after reunification.

Business expectations were up strongly from 105.2 to 106.5.

The current assessment component surged from 121.4 to 123.2 and hence also to its highest level since 1991.

When looking at sectors, especially manufacturing and construction companies became again more optimistic.

Both the forward-looking expectations and the current assessment components among manufacturers increased.

The current assessment figure in the construction industry hit another record-high level.

Undoubtedly the news is good for the Eurozone outlook and we would expect the Euro to remain supported. But the chance of such surprises being repeated in future months are unlikely.

“The latest renewed and strong rise in German business sentiment is great news. However, the air for further improvement is increasingly getting thin. While it is impossible to forecast exactly when the peak will be reached, it is clear that we are getting close to it. Repeatedly strong increases in the next few months towards levels seen before reunification (i.e. sentiment among companies in Western Germany) are unlikely in our view,” says Dr. Andreas Rees at UniCredit Research.

Indeed, we have heard that the Euro is starting to look a bit overpriced at current levels and the recent run higher might be getting overdone.

Could the best now have passed for the currency?

Judging by the Pound to Euro exchange rate's recent jump, many will be hoping this is in fact the case.