Global market rally fails to boost GBP exchange rates

• Global markets rally as bond markets stabilise and hopes for a sustainable economic recovery strengthen
• Wall Street and European bourses return to winning form
• All eyes on UK Chancellor Rishi Sunak’s Spring Budget
• Pound Sterling (GBP) exchange rates continue to head lower in currency markets

US bond yields have surged in recent weeks amid growing expectations that higher growth and rising inflation in the United States and other countries will cause central banks to withdraw stimulus and tighten fiscal conditions.

As rising bond yields drive up corporate finance costs, investors have piled into risk-off assets, hence the US dollar’s (USD) recent appreciation.

The surge in bond markets appears to have spooked investors by invoking memories of 2013’s “taper tantrum”, which resulted in a sharp sell-off of bonds and assets following the Federal Reserve’s (Fed) decision to withdraw stimulatory support.

While bond markets have stabilised on Tuesday, rising yields have caused investors to question consensus expectations for a US dollar (USD) depreciation in 2021 as anxieties over inflation tend to renew demand for the greenback.

However, Barclays bank analysts told clients that they don’t believe the recent rise in bond yields reflects the taper tantrum of 2013 but 2016’s move. Barclays added: “In this light, further rates sell-off driven by better growth prospects and additional fiscal packages could support USD and commodity G10 currencies.”

Moreover, the Federal Open Market Committee (FOMC) members have insisted that it is too early to withdraw US stimulus as the economy still needs support and downplayed inflation concerns. The Fed has also gone through great pains to convey that stimulus will remain in place until financial conditions return to normal to ensure markets remain orderly.

The news, which renewed hopes for a more sustainable economic recovery, has eased bond yields on both sides of the Atlantic and triggered a global stock market rally.

Stock markets rebound as hopes for sustainable economic recovery solidify

Global stock markets surged after the Fed restored hopes for a more sustainable economic recovery from COVID-19.

US bond yields had been rising amid growing concerns that increased government spending, stimulus injections from central banks and growth prospects would cause inflation to spike – a move that would require monetary authorities to raise interest rates.

Higher inflation would also make it difficult for businesses and individuals to access cheap borrowing as it reduces the purchasing power of a currency.

However, renewed hopes over global economic recovery have allowed global stock markets to pare last week’s losses and record substantial advances on Tuesday.

Wall Street’s Dow Jones Industrial Average (DJIA) closed 603.14 points higher on Monday at 31,535.51, while the S&P 500 (INX) rallied by 2.38% or 90.67 points to close at 3,901.82.

Meanwhile, the tech-heavy Nasdaq Composite (IXIC) rallied by 3.01% or 396.48 to 13,588.83.

European stocks also rebounded from last week’s sell-off, with optimism over COVID-19 vaccine rollouts supporting gains.

Germany’s DAX PERFORMANCE INDEX (DAX) has jumped above pre-pandemic levels on Tuesday, while London’s blue-chip FTSE 100 Index (UKX) has risen 30.11 points or 0.46% to 6,618.64 at the time of writing – cementing Monday’s triple-digit gain.

UK Chancellor Rishi Sunak is also doing his best to ensure investors remain attracted to London stock markets and is expected to use his Budget to revamp Britain’s stock exchange listing rules, particularly for UK tech listings.

Mr Sunak hopes to make the UK more attractive for tech giant’s post-Brexit by allowing the ability to float dual-listed shares, which gives investors more management control of their companies.

Positive developments out this week have already swept last week’s concerns under the rug while easing bond yields have amplified the recovery in risk.

Commodity currencies and riskier assets are benefiting from the pile into equities. However, pound Sterling (GBP), which tends to rise when global markets are rallying, has failed to capitalise on shifting sentiment as weak GBP fundamentals remain a cause for concern.

Several market analysts believe that GBP is overvalued and in overbought territory and suggest that this week’s weakness could be here to stay.

Pound Sterling Forecast: GBP/USD and GBP/EUR

According to analysts from NatWest and Barclays bank, pound Sterling’s (GBP) bullish run against major trading rivals such as the US dollar (USD) and euro (EUR) could be running out of fuel as investors have already priced in most of the good news.

The British pound (GBP) has been driven by the UK’s lead in the race to immunisation in recent months. However, with more countries rolling out Coronavirus vaccines rapidly and growing expectations that differing vaccine success rates will level out in the long-term, euphoria over the UK’s vaccination programme appears to be fading.

While the British pound to US dollar (GBP/USD) exchange rate has recovered from its early morning slump, Cable continues to trade off multi-year highs at USD 1.3918.

Foreign Exchange (FX) analysts at JP Morgan also forecast sustained pressure in the British pound vs US dollar (GBP/USD) exchange rate in the long-term and expect GBP/USD to end the year at the USD 1.34 level.

JP Morgan’s projection comes just days after GBP/USD hit a 2018 high of USD 1.42343, and the British pound to euro (GBP/EUR) exchange rate surged to eur 1.1701.

Although the British pound vs euro (GBP/EUR) pair has retreated from yearly highs, the currency pair is trading 0.2% higher on Tuesday at EUR 1.1577, and rising COVID cases in the EU could fuel fresh upside in GBP/EUR.

Rising EU COVID-19 cases could support GBP/EUR

While the UK’s COVID-19 infection rate is plunging, the virus continues to spread in the EU, and as this makes hopes of a sustainable lockdown exit in the Eurozone more ambiguous, GBP/EUR could extend gains over the coming days.

According to the latest government statistics, the UK recorded 5,455 new coronavirus cases and 104 deaths on Monday – the lowest toll since October 2020.

However, the European Centre for Disease Control and Prevention (ECDC) said that 13 EU countries had reported a weekly rise in COVID-19 cases last Sunday.

Meanwhile, German Chancellor Angela Merkel said Eurozone’s largest economy is heading into a third wave of the COVID-19 pandemic. The Chancellor went on to say that lifting lockdown restrictions anytime soon will be unlikely given that the infection rate continues to rise.

Although the UK suffered one of the steepest economic downturns of any leading economy, if it can get a head start in the recovery game, this should brighten growth prospects and help lift pound Sterling (GBP) exchange rates.

Tuesday’s light economic calendar means all eyes are on Chancellor Rishi Sunak’s Spring Budget, which will need to provide support for businesses and layout plans to bring public finances to a more sustainable level.

FX market participants may be looking out for spending measures and giveaways that could trigger a consumer spending boom this summer and boost UK economic recovery.