The British Pound starts the new week with renewed losses against the Euro and Dollar, but some analysts say the declines could soon start to fade and some bargain hunters could offer some support to Sterling.
The Pound-to-Euro exchange rate last week saw its largest weekly decline since September amidst a reversal of recent currency trends gripped markets, though Sterling would recover lost ground this week if prevailing rates around 1.15 succeed in drawing bargain hunters from the woodwork.
Sterling fell by more than two percent against the Euro in its worst week since the internal market bill debacle of September 2020, declining from 1.18 during the Monday public holiday to close the week just above the 1.15 handle and at its lowest level since early March.
The Pound was the worst-performing major currency of the period but followed closely behind by the U.S. Dollar, which was the second-worst, with commodity Dollars from Canada, Australia, and New Zealand not far behind in price action that was incongruous with widespread gains for stock markets.
Given its workhorse role within the UK’s vaccination program, now-dissipating uncertainty about the viability of Astrazeneca’s vaccine may have led some observers and traders to infer risks to an outlook that’s seen analysts and economists eyeing the UK for the top of the recovery class in 2021.
But price action over on the continent as well as elsewhere in the market suggests strongly that Sterling’s losses were the result of a global phenomenon where investors took profits on earlier bearish wagers against the single currency, of which the Pound-to-Euro rate was the single largest beneficiary.
“GBP felt the perfect storm of the vaccination concerns and the heavy one-way positioning. Before the sell-off, GBP was the biggest speculative long in the G10 FX space vs USD (as measured by CFTC). However, on vaccinations, the UK regulator pointed out that the balance of benefits and risks still favors the AZ vaccine,” says Petr Krpata, chief EMEA strategist for FX and bonds at ING.
Krpata and the ING team say Sterling’s fundamental appeal is still intact and are looking for EUR/GBP to decline back toward 0.85 over the coming days and weeks as a result, which would lift the Pound-to-Euro rate back to 1.1764.
“We expect sterling to recover fairly soon,” Krpata says. “With the EU Recovery Fund stuck in a German courtroom, the EUR re-rating story may have to wait.”
Pound-to-Euro rate declines came alongside the strongest Euro-Dollar performance since the week ending November 23 and the aftermath of the U.S. election, which indicates that much of the move lower in GBP/EUR was the result of investors booking profits on bets against EUR/GBP earlier this year.
Behind the screens, reversing bets against EUR/GBP involves a whole bunch of transactions where GBP/USD is sold and EUR/USD is bought simultaneously. This would always lead to a lower Pound-Euro exchange rate.
“The last time EUR/GBP had a move higher like this was in late February when risk appetite was broadly hit. The lesson then was that the pullback was an opportunity to add to GBP longs. We think this is similar, even though FX positioning is more crowded than before. The medium-term flows we are tracking suggest there is more GBP topside to come and this is likely just a speed bump along the way,” says Jordan Rochester, a strategist at Nomura.
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