British Pound Sterling
Pound Sterling eased after UK inflation slowed in October. Image: File

Home » Pound Sterling got a lift from dollar’s decline vs yen

Pound Sterling got a lift from dollar’s decline vs yen

The pound Sterling got a lift on Monday, taking advantage of a hefty decline in the dollar against the Japanese yen that spilled into other currencies.

British Pound Sterling
Pound Sterling eased after UK inflation slowed in October. Image: File

Reuters: The pound Sterling got a lift on Monday, taking advantage of a hefty decline in the dollar against the Japanese yen that spilled into other currencies.


Against the yen, the pound fell by almost 1% after Bank of Japan Governor Kazuo Ueda at the weekend said the central bank could end its policy of negative interest rates, which has undermined the yen, when achievement of its 2% inflation target is in sight. The dollar bore the brunt of the rush into the yen, falling by the most in two months against the Japanese currency. Sterling was last up 0.4% against the dollar at $1.2521. Against the euro, the pound put in a slightly less robust performance, rising by 0.2% to 85.70 pence.

The pound fell by almost 1% against the dollar last week, as a combination of stronger economic data and weaker investor confidence fuelled a push into the U.S. currency. It has lost about 5% in value since July’s 15-month peak, but it is still up by over 20% since last September’s record lows and is up 3.5% so far this year, pitting it against the Swiss franc, the top performer against the dollar in 2023, which is up 3.7%.

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The Bank of England meets next week to discuss monetary policy. Traders are attaching a 70% chance of a quarter-point rise in the Bank Rate to 5.50%. But they have slashed the chances of another rate rise after that, marking a sharp turnaround from just a week ago, when money markets showed UK rates were expected to peak at closer to 5.7% by March. Part of sterling’s resilience this year has been the perception that the BoE has a lot more work to do to bring down inflation and will need to raise interest rates more than many other central banks.

But with the end seemingly in sight as far as markets are concerned, sterling may struggle to gain much upward momentum in the coming weeks, according to MUFG strategists led by Derek Halpenny. “We currently still expect a hike but weak key data into the meeting could see conviction on a hike undermine sterling performance further over the short-term,” they said in a note.

The MUFG team said according to their valuation models, sterling is one of the most undervalued currencies against the dollar, to the tune of 3.23%. Their model uses short-term swap rates, the performance of the stock market and where short-term bond yields trade relative to longer-term ones. Right now, the pound is trading at a large discount to their model. “Short-term shifts between spot and the model suggest a currency pair is no longer in sync with financial and economic fundamentals and the market is adding a risk premium to the currency pair,” they said.

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Reuters: Resilient U.S. growth is fueling another rebound in the dollar and sending bearish investors scrambling, though the rally will be tested by a gauntlet of data and the Federal Reserve’s meeting later this month. The U.S. dollar index, which measures the currency against a basket of its peers, has surged 5% since late July and stands at its highest level in around half a year. The greenback’s gains have pressured the currencies of the world’s biggest economies, sending China’s yuan to its lowest since December 2007 and spurring expectations for the Japanese government to intervene and prop up the battered yen. Many market participants had expected the U.S. economy to soften this year under the weight of the Fed’s rate increases, pushing the dollar lower.

While the dollar faltered over the summer, growth has wobbled in many of the world’s major economies while remaining comparatively robust in the United States. That has supported the idea that the Fed will leave rates at around current levels for longer than previously expected and boosted the relative attractiveness of the greenback. Signs that the dollar will continue enjoying its yield-advantage over other currencies have undercut support for bearish views on the greenback. Speculators’ net short bets on the dollar shrank to $7.17 billion last week, from a two-year high of $21.28 billion in late July, data from the Commodity Futures Trading Commission showed.

“It’s really just the strength of the U.S. economy, relative to the rest of the world,” said Vassili Serebriakov, foreign exchange and macro strategist at UBS. “Markets have really come back to the theme of U.S. exceptionalism.” That theme will be tested in September, as the market braces for a flood of key U.S. economic data as well as the Fed’s monetary policy meeting. Among the data points in focus will be Wednesday’s report on U.S. consumer prices; signs that inflation is cooling faster than expected could see investors reassess bets on how long the Fed will leave rates at current levels.

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Fed Chairman Jerome Powell’s message at next week’s monetary policy meeting could also influence the dollar’s trajectory. Most investors believe the Fed is done hiking interest rates and are gauging when the central bank might start easing monetary policy – though expectations have been pushed back from late 2023 to early 2024 due to the U.S. economy’s strength. Investors would likely need to see a noticeable turn in U.S. economic data that argues for the Fed to soon begin easing rates in order to change their sentiment on the dollar, said Steven Englander, head of G10 FX research at Standard Chartered.

While Englander is bearish the dollar in the medium term, the currency’s “underlying drivers have been going so much in the opposite direction,” he said. A stronger dollar can be a headwind for risk assets as it helps tighten credit conditions while weighing on the profits of U.S. exporters and multinationals. The S&P 500 is down 2% from its late July high, though it is still up 17% for the year. A Reuters poll found that 81% of analysts surveyed believe the risks to their dollar forecasts are to the upside for the remainder of 2023, though many still believe the greenback will trade lower a year from now.

Some bearish investors, on the other hand, said risks in the dollar are asymmetric, that is, the downside on the dollar far exceeds its upside following a multiyear rally that has seen it rise 28% from its January 2021 low. The dollar index is 8% off from a high reached in September. UBS’ Serebriakov said it’s a good time to gradually start accumulating short positions that favor the yen and British pound against the dollar. Other dollar rebounds this year, in March and May, failed at levels not far from where the dollar index trades now.

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Meanwhile, analysts at TD Securities said the dollar is vulnerable to sudden changes in data. They believe retail sales numbers, due out on Wednesday, could badly miss their mark. Still, even staunch dollar bears are reluctant to bet against the currency. Kit Juckes, chief FX strategist at Societe Generale, has a longer term bearish view on the dollar but is nevertheless a buyer of euro-dollar puts on expectations that the U.S. currency will mount a final push higher. “The market has reassessed the growth outlook positively in a pretty significant way over the summer,” he said. “I ain’t standing in the way of this bus, this bus could run you over with ease.”


Reuters: The South African rand extended gains against a weaker dollar on Monday as encouraging economic data from China aided some emerging market currencies. At 1542 GMT, the rand traded at 18.8775 against the dollar, 1.35% stronger than its previous close. The dollar last traded around 0.27% weaker against a basket of global currencies. Strong lending data and fresh stimulus measures from China – South Africa’s biggest trading partner – supported risk-sensitive currencies such as the rand.

Locally, the currency seemed little affected by South Africa’s manufacturing output figures, which rose 2.3% year on year in July after rising by a revised 5.9% in June. In the absence of major local economic data points, investors this week will turn their focus towards U.S. inflation data due on Wednesday. “Risks are elevated midweek, starting with U.S. CPI on Wednesday, followed by ECB rate announcement and press conference on Thursday,” RMB analysts said in a research note.

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Inflation data out of the U.S. could give clues on the Federal Reserve’s interest rate path before it convenes next week and might influence the risk-sensitive rand. Shares on the Johannesburg Stock Exchange rose, with the blue-chip Top-40 index ending 0.73% higher. South Africa’s benchmark 2030 government bond was marginally weaker, with the yield up 1.5basis points at 10.390%.


Reuters: Asian stock markets edged up on Tuesday while comments from central banks in China and Japan interrupted the dollar’s ascent, giving traders a breather ahead of U.S. inflation data that could influence when or if the Federal Reserve raises rates further. The yen notched its best day against the dollar in two months overnight, after Bank of Japan Governor Kazuo Ueda said policymakers might have enough economic information by the year-end to determine that short-term rates will need to rise. The yuan had its best day in six months after authorities vowed to correct one-way moves and Reuters reported the central bank had stepped up scrutiny of dollar buying.

Both, however, remain near their weakest levels of the year and with the yuan at 7.3016 per dollar in offshore trade and the yen was last at 146.68 per dollar, a little weaker than its best level on Monday. Japanese government bonds remained under pressure on Tuesday, with 10-year JGB yields up 1 basis point to a fresh high of 0.71%. “The result of Ueda’s comments was an intense move higher in Japanese swaps and government bond yields,” said Chris Weston, head of research at brokerage Pepperstone in Melbourne.

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“It is certainly constructive for yen longs. But I refrain from getting too excited at this stage, where the actions are more of a medium-term issue – we won’t get the outcome of the spring wage negotiations until April 2024.” Investors in China drew some comfort from news that the country’s largest private property developer Country Garden has won approval from creditors to extend repayments on six onshore bonds by three years. That lifted Hong Kong’s Hang Seng Mainland Properties Index as much as 1.5%, reversing an earlier drop of more than 2%.

“This is likely just another case of kicking the can down the road, but it seems to have slowed the bleeding on the property index at least,” said Matt Simpson, senior market analyst at City Index. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.12%. Japan’s Nikkei rose 0.61%, with markets looking to U.S. inflation data and this week’s European Central Bank meeting to set interest rate expectations and the mood. Due on Wednesday, markets are expecting the U.S. figures to show annualised core inflation falling to 4.3% in August though the headline number is seen ticking up to 3.6%.

“A lower-than-expected print may slow the U.S. dollar’s rise while higher print could potentially un-nerve risk sentiments as it would reinforce market expectations for further rate hikes, and this could fuel dollar strength,” said OCBC strategist Christopher Wong. Interest-rate futures markets are pricing about a 45% chance of another U.S. rate hike by year’s end. Investors’ appetite for risk is also to be tested this week when British chip designer Arm Holdings lists in New York with a goal of raising almost $5 billion. Overnight, the weaker dollar and upgrade on Tesla from analysts at Morgan Stanley helped U.S. stock markets gain. Tesla rose 10%. The S&P 500 rose 0.7%.

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In early Asia trade, U.S. futures slipped 0.11%. Elsewhere in currency markets, the Australian dollar was weighed by a further slip in consumer sentiment, which has been below the neutral 100 mark since March 2022 – the longest streak since a recession in the early 1990s. The Aussie, which bounced on Monday with gains in the yuan, was last 0.04% higher at $0.6433. The New Zealand dollar meanwhile dipped 0.3% to $0.5918.

The euro notched a one-week high against the dollar, though moves have been muted with investors dialling back long euro positions ahead of Thursday’s ECB meeting. Pricing implies about a 56% chance that policymakers leave rates on hold. “There is a sense that ECB is already done for the cycle,” said Maybank analysts in a note to clients. “Recent PMI prints suggest that growth outlook could be deteriorating and puts the euro at risk of further downside. This is all the more amplified by lingering expectations for the Fed to hike further.”

Benchmark 10-year Treasury yields were steady at 4.2940%. In commodity markets, Brent crude futures were steady at $90.96 a barrel. Gold hung on at $1,922 an ounce, while bitcoin was out of favour and dropped below $25,000 for the first time in three months on Monday.

Published by the Mercury Team on 12 September 2023