Pound Sterling extends losses amid global stock market rout
- Pound Sterling (GBP) slides amid a global stock market sell-off triggered by chaos on Wall Street
- British pound (GBP) limits losses due to benefitting from vaccine boost
- Euro (EUR) pressured by speculation that the European Central Bank (ECB) will perform another rate cut
Pound Sterling (GBP) exchange rates have been considered undervalued in the last few years, with uncertainty stemming from Brexit negotiations being cited as the reason for downside in the UK currency.
However, the British pound (GBP) reclaimed some of its losses into 2021, even rallying to a 37-month best against the US dollar (USD) due to a combination of Brexit certainty and vaccine optimism which is buoying hopes of a return to regular economic activity.
The British pound to US dollar (GBP/USD) exchange rate rallied to USD 1.3758 earlier this month – its highest level since April 2018. While there are mixed opinions on pound Sterling’s (GBP) medium-term outlook, market analysts at Citibank forecast the GBP/USD pair rising to USD 1.38 in the next three months and USD 1.45 over the long-term.
Today, however, the British pound (GBP) trades on the back foot in currency markets, tracking moves in global stock markets. European equities plummeted earlier in the session, mirroring a chaotic day on Wall Street, triggered by concerns over speculative trading.
While global markets are not as chaotic as Wednesday, pro investors remain concerned over whether equity markets will resume its relentless rise, with amateur investors creating frothy market conditions due to fears over the impact of new COVID strains.
As the British pound (GBP) has started to show an increasingly positive correlation to moves in global stock markets, the UK currency plummeted against the safe-haven US dollar (USD) and the euro (EUR) as stocks headed lower.
A general rule of thumb in foreign exchange (FX) markets, risk-sensitive currencies such as the British pound (GBP) tend to outperform the risk-off US dollar (USD), euro (EUR), Japanese yen (JPY) and Swiss franc (CHF) when stocks rise and fall when the opposite is true.
While pound Sterling (GBP) has recovered somewhat on Thursday, the British pound to US dollar (GBP/USD) exchange rate remains subdued at USD 1.3645. However, the British pound to euro (GBP/EUR) exchange rate is flat at EUR 1.1292, supported by the UK’s positive vaccination story.
Pound Sterling benefitting from vaccine boost
Although the global stock market sell-off is limiting the British pound’s (GBP) upside potential, the euro (EUR) is being pressured by the EU’s laggard vaccine rollout, weak German economic data and speculation that the European Central Bank (ECB) will cut rates.
Britain has vaccinated more than 7 million people, equivalent to 13% of its population, compared to the EU, with approximately 2% of people across the bloc inoculated.
UK Prime Minister Boris Johnson has also dismissed reports that the EU will snatch COVID vaccines from the UK to compensate for the shortfall across the European Union, which GBP traders will have seen as positive.
However, Saxo banks head of FX strategy, John Hardy, forecast pound Sterling (GBP) sliding in his latest currency projection.
Mr Hardy noted that while the UK is ahead of its European neighbours in the race to immunisation, GBP is unlikely to prosper amid weak risk-on conditions relative to the US dollar. He went onto say that “this very ugly rally of endless small rises and extensive backfilling may be at risk of a positioning cleanout that could see GBP/USD retreat to USD 1.3250, or worse, USD 1.3000.”
John Hardy warned that this could be a likely scenario if the vaccine shortage persists and a less generous than expected US stimulus packages is passed. According to President Joe Biden, the USD 1.9TN proposal includes stimulus checks worth USD 1,400, a USD 400 unemployment supplement and an increase to minimum wage, all of which are important from an FX markets perspective as large spending packages support recovery.
With FX markets in a more cautious mood on Thursday, how pound Sterling (GBP) trades today will largely depend on broader moves in the global stock market and economic indicators out of the United States (US).
If US gross domestic product (GDP) data misses expectations, the British pound (GBP) could extend its losses against the greenback and the single currency. Traders will also be focusing on US Initial Jobless Claims data and Continuing Jobless Claims figures. If these figures show an improvement, this could limit losses in the GBP/USD, and GBP/EUR crosses.
That being said, losses against the euro (EUR) are likely to be limited on Thursday after ECB sources hinted at the central bank performing a rate cut.
Euro pressured by ECB rate cut speculation
The euro (EUR) has lost its upward momentum in recent weeks due to a lack of confidence in the EU’s COVID-19 response, Eurozone’s laggard vaccine rollout and rising deflationary pressures.
EUR exchange rates could now be at risk of further losses after ECB policymaker, Klaas Knot, raised expectations for a negative rate cut after expressing his concerns over the euro’s strength (EUR) and its impact on inflation.
Although Chief Economist, Philip Lane, has said the ECB has other monetary tools at its disposal to deal with the ongoing headwinds caused by COVID-19, Mr Knot insisted that “there is still room to cut rates.”
Adding to the euro’s downbeat mood (EUR) was Wednesday’s release of Gfk German Consumer Confidence data, which is forecast to plunge to -15.9 in February from -7.5 in January and far lower than the expected -7.9.
The data marked the fourth successive month of declines, and as Eurozone’s largest economy, Germany, continues to struggle with its fight against COVID-19, consumer sentiment has slumped.
Although German CPI accelerated in January, the figure remains well below the target, and as a result, the data did little support EUR exchange rates.