RedFX Snap: GBP Special - A furious few days for GBP
A furious few days for GBP
To start – this morning’s huge slump in GBP is in reaction to the speculation in the FT and on the BBC that there may be an emergency hike prior to the November Bank of England rate meeting, sparking huge panic in markets.
From 1.1425 to 1.0650 in 5 days marks a 7% drop and the unwelcome return of extreme volatility in FX markets. The GBP options market is trading at levels comparable to the 2007 Financial Crisis and the implosion of GBP at the start of the pandemic.
There are plenty of commentaries around, but the best is from an ex-colleague of mine on Linkedin, and he won’t mind if I steal his points to benefit all of us:
Bank of England Meeting
Hiked the Bank rate 50bps, vote split - 5 (50bps) : 3 (75 bps) : 1 (25bps)
The Bank sees an inflation peak of over 11% in October
The Bank acknowledged that the energy package would reduce headline inflation by 5 percentage points in 2023, but that it adds to medium term inflation pressures
The Bank sees a technical recession in 2Q and 3Q this year
Mini Budget - there is plenty to digest, but here I focus on the 2 factors that influence the currency
Energy relief package to cost £60bln in 6 months
The total projected cost implication is £161bln over 5 years
As it was a ‘mini-budget’ (in name only, given the extent & scope of the announcements), the Office for Budget Responsibility (OBR) did not have to show the ‘funding’ side of the budget announcements – in my opinion, this omission has amplified & accelerated the slump in GBP.
Initial reactions up to now have seen the pound slump from 1.1300 to approach 1.0700 against the USD. The market is now priced to reflect over 3% of rate hikes in the next 3 scheduled meetings and this is reflected to be frontloaded with 1.5% priced for November.
Where now? Last week someone asked me if GBP/USD could reach parity and I said no, the 1.0900 / 1.0700 level will be hard to break. I have eaten my hat and am starting on the humble pie as a mid-morning snack. This morning’s panic saw us dart down to the 1.0400 level easily. Negative sentiment, momentum and economic realities are pushing GBP to new lows and none of those factors will reduce or stop soon.
GBP/EUR at 1.2000 (April 20220) and GBP/USD at 1.2000 (August 2022) - levels that now seem a distant memory..
In other news:
EURO: Germany’s key IFO Business Climate fell to 84.3 from 88.5 last month and the Current Assessment Index fell from 97.5 to 94.5. Across all sectors, these are poor numbers from Germany, helping to push EUR/USD under 0.9700. Recent low levels of 0.9550 continue to pressure the Eurozone economy.
With lots of weak data, the ECB committed to bringing inflation back to its 2% target, but seemingly in ‘wait and see’ mode, the EURO will struggle to fight back against currencies that are committed to raising rates quickly and aggressively.
USD: Why so strong? Simply put (by someone smarter than me) – Risk aversion, hawkish Fed commentary and rising US Treasury bond yields play a role in the dollar's impressive performance.
GBP/USD 1.07
GBP/EUR 1.1100
EUR/USD 0.9650
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The RedFX Team
