A Bad Week for the British Pound
In the current market environment, when the pound is up against the euro it is down against the US dollar and commodity currencies such as the Australian, New Zealand and Canadian dollars.
"We still think EUR/GBP is far too high at current levels" - ING.
This dynamic played out mid-week in the wake of the announcement that China injected 140 billion yuan ($21.8 billion) into the interbank money market.
The pound saw some eye-watering losses against the likes of the NZD, ZAR, AUD and CAD.
Unfortunately for those watching GBP/EUR the gains were not of a similar magnitude, indeed sterling is something of a laggard in global FX as we close out August.
The move by Chinese authorities to inject capital into the markets follows the interest rate cut at the central bank the day before - the move that really got the recovery in the USD, CAD, ZAR and co. under way.
It would appear that all the ‘Black Monday’ gains in the pound sterling have been reversed as markets believe authorities have shown decisive leadership in dealing with any potential slow down. Wa the China panic just a non-event? Market pricing on Thursday would suggest so.
Latest Pound/Euro Exchange Rates
  | Live: 1.1456▲ + 0.11%12 Month Best:1.2162 |
*Your Bank's Retail Rate
| 1.1066 - 1.1112 |
**Independent Specialist | 1.1296 - 1.1341 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Pound to Recover Against the Euro
The GBP/EUR exchange rate recovery is starting to look a little more convincing at the present time with GBP proving that support at 1.36 is indeed solid.
Should fears over China ease further we believe the Bank of England will stick to its guns with an early 2016 interest rate rise.
This is the fuel need for the GBP to rally.
“We still maintain the working hypothesis that the topside in EUR/GBP is growing better protected, with important resistance in the 0.7483/0.75 area. Interest rate differentials between the euro and sterling are still substantial and in favour of the UK currency. A cautious sell-on-upticks approach can be considered,” says Piet Lammens, an analyst with KBC Markets.
We get a sense that calm is returning and the currency market has returned to where it should be.
Markets Back to Normal, EUR/GBP Overvalued
The strong 4% Wall Street gains overnight and the more subdued 2% gain on the Shanghai bourses this morning has created a strong risk on tone. Nervousness remains and renewed losses are certainly possible, even likely, at some stage but the bias is now towards recovery.
The dollar has rallied hard on the improving sentiment: EUR/USD is back at 1.1350, after having touched 1.17 earlier this week
A second Fed member, Dudley, has now suggested that the market turmoil might delay rate hikes. Futures are still predicting a 24% probability of a move in September.
Watch out for further Fed commentary at, or on the sidelines of, the Fed’s Jackson Hole symposium.
GBP has been under-performing on the back of the equity sell-off, where the large weight of financial services in the UK economy typically weighs at times like these.
“Despite this sell-off, we still think EUR/GBP is far too high at current levels (again UK hard data should hold up) and we still see value in returning to long GBP/SEK positions,” say analysts at ING.
