Precise Investors

Sunday, January 29, 2023

Pound Sterling’s stellar run against Euro, Dollar may end


The Pound dropped amidst a broader decline in stock markets and commodity prices, confirming it to be highly sensitive to investor sentiment

The British pound starts the new week lower than the level during the previous week due to an aggressive sell-off on Thursday and Friday, and one analyst says the currency has now peaked.

Many positives are in the price of the overvalued and overbought GBP in our view, says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The Pound dropped amidst a broader decline in stock markets and commodity prices, confirming the currency to be highly sensitive to investor sentiment.

Therefore trade in Sterling over coming days could well depend on the performance of the broader market.

The big theme at present for investors is the rise in yields paid on government bonds, particularly those of a long duration. This spike in yields comes as investors dump these bonds, fearing higher inflation in the future which would devalue their investments.

However, the rise in bond yields actually reflects expectations for economic growth, which would typically be expected to support stock markets and other ‘risk on’ assets, of which the Pound is now considered.

Therefore, good news out of the U.S. economy could well be bad news for markets and the Sterling. This is because investors are betting that good economic data means the Fed will ultimately withdraw the fiscal stimulus that has fuelled markets higher.

If this week’s U.S. ISMs and non-farm payrolls surprise on the upside and continue this theme, the Dollar could well find itself supported this week says Marinov.

By contrast, Marinov eyes the Pound and Australian Dollar as the two most at-risk currencies should strong economic data trigger another rise in the value of U.S. yields.

Persistently higher UST yields can also start weighing on risk-correlated and commodity currencies vs. the USD. Our recent sensitivity analysis highlights that the AUD and the GBP could be the most vulnerable to a potential combined spike in UST yields and risk aversion, says Marinov.

Turning to the Pound’s stellar 2021 rally which made it the best G10 performer of the year until the end-week selloff, researchers at Crédit Agricole say the gains are now in and a weaker profile is likely.

Many positives are in the price of the overvalued and overbought GBP in our view, says Marinov. The GBP has little else to offer beyond its apparent vaccine advantage.

According to modelling by Crédit Agricole, the Pound Sterling comes in last in a ranking of forex fundamentals due to the UK’s inferior economic productivity, current account deficit, recent stock market performance, low real yields and extreme lockdown severity.


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