The Pound's Rout Against the Euro and US Dollar Takes a Pause, More to Come?

Pound sterling rates are deep in the red as global markets take a tumble with big-name banks stoking the fear.

Sterling is a winner against the euro when investors are happy and stock markets are rising. It is a loser when the opposite is true.

Unfortunately for the UK unit, Thursday is seeing a fresh bout of selling on the stock and commodity markets which has taken the pound to euro exchange rate back to levels last seen in January 2015.

"The main pain is being felt on the continent, with Credit Suisse hitting a 25 year low and Societe Generale (which warned it may miss its profit targets for 2016 due to the dual pressures of tighter regulation and the current market conditions) dropping a whopping 12%," note analyst Connor Campbell at Spreadex.

When markets are in sell-off mode the euro benefits as investors buy the currency to pay back the vast sums of euros borrowed at record low interest rates used to fund market investments.

The euro is no safe-haven, as we have said for some time now, rather it is a currency that is cheap to borrow and use to finance higher-yield and therefore risky investments elsewhere.

Sterling on the other hand is not as cheap and therefore does not enjoy the same 'repatriation' advantages of the euro. It has in fact established itself as a risk play i.e when markets are sold, the pound is sold.

Bottom line? Keep an eye on stock markets when watching GBP/EUR!

On Thursday we see the pound to euro spot exchange rate at 1.2741 with banks offering international payments at about 1.24 and independent payment providers offering rates towards 1.2600. Beware that spread charges will likely rise in these volatile conditions.

Latest Pound/Euro Exchange Rates

	Live: 1.1452▲ + 0.08% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1063 - 1.1108
**Independent Specialist	1.1292 - 1.1337 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

US Markets See Sell-Off Pause

The opening of markets in the US have stabilised the pound, but one asks for how long.

"Initially threatening a 300 point plunge when the bell rang on Wall Street the Dow Jones settled into a more solid, if still troublesome, 175 point drop as the open receded into the background," says Campbell, "the Dow was probably saved (and this is all relative, remember) by the fact that the blood loss endured by the US banking sector was nowhere near as gory as the scenes over in Europe, Bank of America the worst hit at around a 4% decline."

Turning to the Eurozone the DAX and CAC fell as deep as 2.5% and 3% respectively, the former hurt by Deutsche Bank’s 5% fall with the latter dropping below 4000 as the day got underway.

"Returning to the same suffocatingly sparse-calendar that plagued the start of the week, the day’s main event (beyond a Yellen-repeat in front of Congress this afternoon) is likely the Eurogroup meetings, with the region’s finance ministers set to discuss the continual hot potato that is the most recent Greek bailout," says Campbell.

UBS, Credit Suisse in Trouble

While commodity prices and commodity-orientated companies have been in trouble for some time, a new spurt of selling has emerged as concerns grow over Europe's banks. Credit Suisse shares are lower by 8% and UBS by 5% confirming this to be the frontline of the current malaise.

The latest results from UBS and Credit Suisse reflect the pain of market volatility and underline the restructuring challenge faced by Credit Suisse in particular.

Both banks disappointed the markets in turn with their fourth-quarter 2015 results. As the S&P Global Market Intelligence tables show, neither performed well and Credit Suisse even published a striking CHF5.8 billion quarterly loss.

"While still engaged in significant cost cutting, UBS has ostensibly completed its major restructuring while Credit Suisse's looks to be a work in progress. This is perhaps encapsulated by the CHF3.8 billion goodwill impairment taken by Credit Suisse in the final quarter of 2015 for a bank acquired in 2000," says a note from S&P Global Market Intelligence.

S&P go on to point out that figures were also hit by restructuring featuring job cuts as well as by mark-to-market losses on collateralised loan obligations, commercial MBS and distressed debt where spreads have widened.

Poor UK Data Confirms Weak GBP Fundamentals

We saw GBP gain mid-week as markets recovered strongly. The gains did however fly in the face of some poor economic data covering the UK manufacturing sector.

ONS numbers show monthly industrial production fell by 1.1% in December, worse than the 0.1% decline that was forecast. This adds to the 0.8% decline seen in November.

Manufacturing production for December fell by 0.2%, worse than the expected 0.1% gain that was forecast. That said there was a small, albeit ultimately irrelevant upgrade to the November figure which was revised up to -0.3%.

This is the biggest drop in the production numbers since 2012 and confirms that the UK is feeling the impact of a slowing global economy and the downturn in global confidence.

“It appears as if an increase in output from larger manufacturers was not enough to return the sector to growth, and reports of underlying staff cuts will be cause for further concern,” says Dennis de Jon, Managing Director at UFX.

“With global financial markets continuing to undergo extreme volatility, we will have to wait to see if the manufacturing sector can build some momentum in the face of weakening demand from emerging markets, not to mention negative headwinds from China,” says de Jong.

The one bright spot for production going forward is that the value of pound sterling has fallen notably since November/December which should give UK exporters a welcome cushion.

Also note that the UK economy is a service economy, services account for 80% of output, so the manufacturing numbers should be contextualised.

GBP/USD Watches Yellen

Meanwhile, for the pound to dollar exchange rate the driver is US dollar weakness, so again external drivers are what matter.

Yellen struck a balanced, assured, position and we have seen the US dollar complex maintain a steady tone.

"She has acknowledged that recent economic data has been mixed and that recent market turmoil might impede economic growth," say Lloyds Bank in response to initial proceedings, "however, while recognising the potential downside risks to economic growth she has also restated a belief that the most likely outcome is that US economic conditions continue to improve and that interest rates rise gradually"

She doesn’t give any timeframe for any further interest rates moves the but implication seems to be that while a March interest rate hike now looks highly unlikely rises from the June meeting onward remain possible.

"We continue to think that two interest rate rises remain likely in 2016, but this is in part dependent on markets settling down," say Llouyds.