Deutsche Bank's Share Price Recovery Supports British Pound Against the Euro

Pound Sterling has recovered against the Euro in sympathy with the improvement in the Deutsche Bank share price confirming the continuation of an unlikely relationship between the German bank's share price and GBP/EUR.

• Pound to Euro exchange rate today (28-9-16): 1.1594, see live rate here >>
• Euro to Pound Sterling exchange rate today: 0.8626, see live rate here >>
• Pound to Dollar exchange rate today: 1.3011, see live rate here >>

The fate of Deutsche Bank’s share price remains a strong indicator of the movement in the GBP/EUR at present and we will be watching Germany's largest bank's performance for guidance today.

This week has seen the UK currency track the performance of the embattled bank with a recovery in the share price on Tuesday aiding a recovery in GBP/EUR to back above 1.16.

Germany’s largest bank has seen its share price plumb a record low this week amidst fresh concerns about the bank’s solvency.

This is bad news for Sterling which is considered a ‘risky’ asset at present.

"Sterling performs negatively during episodes of risk aversion due to its reliance upon foreign capital, the position reduction has allowed room for net GBP shorts to be rebuilt," says analyst Jeremy Stretch with CIBC Capital Markets.

It is meanwhile, counterintuitively, good news for the Euro which actually stands to benefit from these risk-off conditions; "note we could be seeing some evidence of balance sheet repatriation behind EUR impetus", says Stretch.

In short, when markets are running scared vast amount of Euros invested across the world are repatriated driving up the value of the currency.

The good news for sterling is that investor concerns over Deutsche Bank's stability have eased after it announced a deal to sell a subsidiary and confirmed it was not seeking government help.

Deutsche Bank said it would sell its Abby Life business to Phoenix Life Holdings Ltd., for 935 million pounds.

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While the Deutsche Bank share price has recovered to 10.50, it is far too early to say the worst is now behind the bank.

"The German bank is threatening to drop under €10 for the first time in around 30 years. This has sparked another round of losses in the European banking sector, with Barclays, HSBC and Societe Generale all seeing notable declines," says Campbell.

Speculators are targeting Deutsche with Markit data suggesting €200MN worth of shorts bets were taken out against the bank last week.

This accounts for around 3% of the bank's share issuance.

This week's bout of selling came as German Chancellor Merkel ruled out any state assistance for the troubled bank.

"The parlous state of Deutsche Bank explodes onto everyone’s radar once again. The bank has been limping along for months now, but reports that Angela Merkel may not step in to rescue the bank have sent the shares tumbling, dragging banks across the UK and Europe lower as a result," says Chris Beauchamp at IG in London.

Remember, Deutsche Bank has been described as the biggest systemic threat to global finance by the IMF who recently stated the bank, “is one of the most important net contributors to systemic risks in the global banking system”.

On September 15th shares in Deutsche Bank plummeted after news that the US Justice Department was looking for $14BN to settle a probe into Deutsche’s mortgage-backed securities business.

"The gut feeling of most investors is that Berlin would be forced to act to avoid the loss of a key institution, but gut feelings do not always make the best trades," says Beauchamp.

Deutsche Bank Matters for the UK and the Pound

The UK economy is heavily orientated to financial services, therefore systemic risks to global finance matter for the UK economy.

Furthermore, faced with a deterioration in global sentiment and economic growth the chances of another interest rate cut at the Bank of England being announced in November become increasingly likely.

And this is the main route to further GBP weakness.

That said, one could argue the European Central Bank would also introduce fresh EUR-negative policy in response to any deterioration in the outlook.

But remember, the Euro is becoming increasingly less responsive to ECB policy after years of aggressive action whereas the same cannot be said for the Pound / BoE relationship.

Markets Welcome Clinton Perforamance

The US Dollar was sold and stock market futures bought after snap polls and bookies put Clinton down as the winner.

This confirms that Clinton is seen as a risk-on candidate by markets.

"The market response to the first US Presidential debate points to a ‘win’ for Clinton. USD/MXN – the closest FX proxy for Trump’s election prospects – was down 2% in the aftermath," says Elsa Lignos at RBC Capital Markets.

Betting markets indicate an increase in the probability of a Clinton victory from around 60% before the debate to close to 70% after the debate. Furthermore, a poll by CNN found that 62% of viewers felt Clinton won.

Looking ahead, we could see this theme play out further were Clinton to solidify her lead.

It would therefore be a GBP-positive theme to be aware of over coming weeks.

Euro Stronger on Improved German Business Sentiment

While Deutsche Bank is grabbing headlines on Monday the 26th it would appear that sentiment amongst German business is on the up.

The Euro was supported by news Germany’s Ifo Business Sentiment data for September was quite a bit stronger than expected, with the headline rising from  106.3 to 109.5 (expectations were for 106.3), and the bigger driver of the upside surprise being expectations (104.5 vs mkt 100.1) moreso than the current assessment (114.7 vs mkt 112.9). 

Alongside the better manufacturing PMI on Friday, it looks like German growth momentum may be picking up into Q4, after Q3 started off on very soft footing.

Also of note today, ECB President Draghi is testifying before the European Parliament’s Committee on Economic and Monetary Affairs at 3pm BST.

"Look for him to defend the ECB’s easing policies thus far, and to shift the focus to the need for structural reform in the Eurozone. Any negative comments on the banking sector may carry extra weight given recent renewed pressure on Eurozone banking stocks," says a note from TD Securities.

And lastly, Italian PM Renzi and his cabinet are supposed to finalise the date for the Referendum on Senate reform at some point today, which is widely expected to come on either 27 November or 4 December.