British Pound Outperforms on Ramsden Comments, US Dollar in Dogbox, Eurozone Political Risks on Rise Ahead of Key Weekend

• On-the-spot exchange rate quotes:
• Pound-to-Euro exchange rate: 1 GBP = 1.1382 EUR
• Pound-to-Dollar exchange rate: 1 GBP = 1.4035 USD

Above: David Ramsden, front left. Bank of England Monetary Policy Committee © Elif Miotti. 

UK interest rate expectations are helping the Pound advance on a weak Dollar while political uncertainty is tipped to rise in the Eurozone over coming days.

The British Pound rose broadly during early trading in London Monday, as markets responded to a steady drip of Bank of England pronouncements on interest rates, as well as another turn lower by the US Dollar.

Bank of England Deputy Governor Sir. David Ramsden said in a Sunday Times article over the weekend that interest rates will need to rise faster than was previously assumed given that inflation remains at 3% and wage pressures are on the rise.

"The Pound has been one of the best performing currencies during the Asian trading session with cable rising back above the 1.4000-level. The Pound has been supported by further hawkish rhetoric from the Bank of England," says Lee Hardman, Currency Analyst with MUFG.

Ramsden says an acceleration in wage growth suggests swifter rate rises are now required and he will be closely monitoring what happens in the early part of 2018 to see if a forecast for wage growth picking up to 3 percent is realised.

He also expressed less concern over the negative impact from Brexit uncertainty on the near-term performance of the UK economy.

"The comments will reinforce building expectations amongst market participants for a faster pace of BoE rate hikes in the coming years. It will encourage the market to further price in the likelihood of a rate hike as soon as in May and another later this year which is offering more support for the Pound," says Hardman.

Ramsden's comments come after BoE Governor Mark Carney and rate setters Ben Broadbent, Andy Haldane and Silvana Tenreyro told parliament last week the outlook for UK wage growth has improved, and that this will likely see the BoE push rates higher over coming months.

Sterling was quoted 0.60% higher at 1.4044 against the US Dollar early on Monday while the Pound-to-Euro rate was 0.37% higher at 1.1398. The Pound also scored noteworthy gains over the Swiss Franc as well as Australian and Canadian Dollars.

Monday’s price action comes amid another turn lower in the US Dollar, which is on the back foot ahead of Jerome Powell’s first appearance in Washington as Federal Reserve chairman, which is scheduled for Tuesday at 08:30 eastern time.

Above: Pound-to-Dollar rate shown at daily intervals. 

“We remain in a range at these upper levels, with a move through 1.4120-1.4220 resistance suggesting a re-test of the 1.44-1.45 region,” says Gajan Mahadevan, a quantitative strategist at Lloyds Banking Group, referring the Pound-Dollar rate.

“The clear break through 1.3900 added further evidence that the bear cycle that started back at 2.1160 in 2007 completed at 1.1490. On a multi-year basis, this suggests mean reversion back to 1.50-1.60. However, sharp pullbacks on negative Brexit news remain a high risk.”

The Euro has enjoyed another stellar run in 2018, aided by a stronger economic growth picture and continued weakness of the US Dollar, which drove the EUR/USD rate up to highs of 1.2555 in early February.

However, political risks rise over coming days ahead of a key weekend of political event risk, which might be felt in the Euro exchange rate complex.

“The story for the euro this week is one of caution as markets shift their focus to the political equivalent of ‘Super Sunday’ this weekend (4 Mar) – with both the Italian elections and the SPD vote on the Grand Coalition on the same day,” says Viraj Patel, an FX strategist at ING Group.

“We think the market may be underestimating the risks here – especially given that the EUR’s pro-cyclical and portfolio inflow-driven rally could run out of steam if political risks stay slightly elevated in the near-term.”

Italy’s general election in March is supposed to be the last remaining risk event in the calendar for the current election cycle, and an important one nonetheless.

Almost all parties vying for electoral support have made pledges that will place Italy on a collision course with Brussels over public spending and the nation’s budget deficit.

The Five Star Movement, Italy’s largest political party and a growing anti-establishment force, has pledged to renegotiate European rules on budget deficits and austerity. It has floated the idea of a referendum on Italy’s continued use of the Euro in the event the negotiation fails.

Opinion polls last week suggested no clear likely winner this Sunday, which opens the door for uncertainty to weigh on the Euro during the week ahead.

Above: Pound-to-Euro rate shown at daily intervals.

“EUR/GBP continues to inch lower in its range. The market recently reversed just ahead of the .8926 mid January high and the 8953 top of the channel. Initial support lies circa .8780. Key nearby support is offered by the December and January lows at .8689/87,” says Karen Jones, a technical analyst at Commerzbank, suggesting the Pound-to-Euro rate could rise as high as 1.1511 this week.

Pound-to-Euro is a foreign exchange cross rate. It is calculated at its most basic level by dividing the Pound-Dollar rate over the Euro-to-Dollar rate. In order for the Sterling to rise against the Euro, the Pound must move further and faster against the Dollar than its continental counterpart does.

With the Pound surging ahead against a weak Dollar, due to renewed optimism around UK interest rates, while political uncertainty weighs on the Euro-to-Dollar rate, there are plenty of grounds to think the Pound-to-Euro rate may head higher over the coming days.

“Prices are under a little more pressure at the start of the week, extending the reversal from the range highs. The break through pivot support highlighted the risks of a shift back towards the range lows, so we are now focused on interim support in the 0.8770-0.8750 region,” says Lloyds’ Mahadevan.

Mahadevan refers to a level of EUR/GBP that translates into a range of 1.1400 - 1.1428 for the Pound-to-Euro rate.

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