29.9.22: UK still in eye of storm, government and BoE rhetoric crucial to Pound and Euro moves against Dollar
There was significant relief for risk assets on Wednesday with a strong rebound on Wall Street as action by the Bank of England (BoE) to buy bonds sparked global relief with a broader drop in yields UK and Global.
This decline in yields triggered a short hedge in equities and also a liquidation of long dollar positions.
Although there has been a short-lived rebound in risk assets, it will be much more difficult to obtain lasting relief, especially as global central banks are still determined to raise interest rates further to stem inflationary pressures.
Barring a change in rhetoric from the Federal Reserve and a series of more supportive inflation indicators, the risk mitigation is unlikely to be sustainable.
British Pound and US Dollar Exchange Rate Outlook
After Wednesday’s European open, the Bank of England announced it would step in to buy long-term gilts in the market to combat the disorderly conditions. It would conduct daily gilt buying operations until October 14 as the market had become dysfunctional and threatened financial stability. The bank also announced that the first sales of gilts planned under the quantitative tightening program would now be postponed until the end of October.
Gilt yields fell sharply after the announcement, although volatility remained extremely high.
There was very high volatility in the pound sterling with an initial higher peak followed by steep losses with the pound-dollar exchange rate (GBP/USD) sliding to lows below 1.0550.
The pick-up in risk appetite helped spark fresh demand for the pound later in the day with an aggressive run of short cover and GBP/USD highs above 1.0900.
General sentiment towards the UK outlook will remain extremely fragile. In this context, the BoE has made it possible to obtain immediate relief, but it will be much more difficult to ensure a lasting recovery in confidence.
Confidence in the government’s economic strategy has plummeted and, in this context, rhetoric from government officials will be important for sentiment, with BoE rhetoric also coming under close scrutiny.
At this point, GBP/USD should face strong selling interest on the rallies with a firm cap towards 1.1000.
Euro (EUR) exchange rate today
There were no major developments in the euro zone on Wednesday, with underlying concerns over energy supplies remaining an important consideration, particularly with strong speculation that sabotage was to blame for the severe damage caused to Nord-Stream pipelines.
The euro to dollar (EUR/USD) exchange rate initially held around 0.9550 before recovering sharply to highs near 0.9750 as risk appetite resumed.
There have also been other hawkish rhetoric from ECB officials, but the underlying confidence in the euro is still very fragile.
According to Wells Fargo; “The fact that some key foreign central banks are lagging the Fed in terms of the pace of rate hikes, as well as falling short of the tightening currently priced in to financial markets, should also weigh on foreign currencies and support the US dollar at the moment.”
He adds; “In fact, we have revised our forecast for the EUR/USD exchange rate down to $0.9100 by the end of the first quarter of 2023.”
US Dollar (USD) Exchange Rate Outlook
Unusually in global markets, the dollar has tended to be influenced more by Bank of England actions than by the Federal Reserve and domestic developments.
The UK central bank’s decision to intervene in the bond markets and buy gilts had a big impact on lower UK yields and there was a noticeable ripple effect on US yields, the yield to 10yr falling to lows near 3.70% vs. 4.00%. and Wall Street stocks rebounded strongly.
Falling yields also triggered a strong retracement in the dollar.
At this point, the Federal Reserve maintains a hawkish stance with the determination to raise interest rates further, potentially in the 4.50% zone from 3.25% currently.
In this environment, it is still likely that there will be strong dollar buying during dips.
Wells Fargo added; “More generally, we see the Fed’s US dollar index against advanced foreign economies gain about another 5% over the next six months. That would take that trade-weighted dollar index to new 22-year highs. »
Other currencies
Exchange rate volatility was very high on Wednesday as moves by the Bank of England helped drive substantial moves.
From lows around 152.50, the exchange rate between the pound and the yen (GBP/JPY) rallied strongly to 157.00 before stabilizing around 156.00.
The exchange rate between the pound and the Swiss franc (GBP/CHF) also rebounded to 1.0650 from 1.0420 with a decline to 1.0570 on Thursday.
New Zealand ANZ business confidence data recovered to -36.7 from -47.8 previously.
The exchange rate between the British pound and the New Zealand dollar (GBP/NZD) settled just below 1.9000 against a low of 1.8800.
The day to come
Comments and actions from the Bank of England will continue to be important throughout the day, with rhetoric from UK government officials also very important for sentiment.
Markets will also continue to watch comments from Federal Reserve officials closely throughout the day.
Trends in yields, equity markets and risk appetite will inevitably continue to have a major impact during the day.
The month-end position adjustment will also be an important item during the day and will contribute to high volatility across all asset classes.
Developments in Ukraine will also be important, especially if Ukrainian forces strive to regain more territory in the Donbass.
