Hot Money Flows Increases Pound Correction Risk

July 25, 2024 - Written by David Woodsmith

STORY LINK Hot Money Flows Increases Pound Correction Risk

The Pound to Euro (GBP/EUR) exchange rate has been held in narrow ranges with no further attack on the 1.1900 level and settled little changed around 1.1875.

There are growing concerns that global speculators have piled into the UK currency which will leave the currency vulnerable to a sharp correction if the hot money flows out again.

The latest COT data registered a record high long, non-commercial position.

Bank of America (BoA) still recommends buying GBP/EUR dips.

Credit Agricole commented; “GBP has starting to look very expensive vs both the EUR and the USD when compared to short-term fair value estimates based on the GBP’s relative rate appeal among other drivers. The GBP further remains one of the biggest longs in the G10 FX market. In turn, this warrants some cautiousness on the near-term outlook for the currency.”

HSBC added; “with markets currently holding a very large net long position in GBP (IMM data), the risks are skewed to the downside.”

Markets will be focussing on next week’s Bank of England (BoE) policy meeting.

BoA commented; “We stick to our August base case for now, largely because we have the impression that the BoE really wants to cut. That probably means they will emphasise the (slow) wage growth disinflation and the volatile accommodation services component in the services inflation surprise.”

The bank’s conviction is, however, getting lower.

From a medium-term view it commented; “If the central bank moves early when data isn’t there yet, that also creates the risk of not only a shallow, but also a shorter cutting cycle than we assume.”

The UK and Euro-Zone PMI business confidence data will also be watched closely this week.

Consensus forecasts are for a slight monthly improvement in both areas with Euro-Zone manufacturing still in contraction.

According to Credit Agricole; “Of particular interest for FX investors would be evidence that the UK economic recovery extended to and even accelerated at the start of Q3. While not central to the debate about the rates outlook at the MPC, it may take indications of persistent economic resilience to convince policymakers to delay any easing beyond August.”

ING focussed on the Euro-Zone data; “the story this week in the eurozone could be soft survey data that supports the ECB's contention that short-term economic risks lie to the downside. This may well be most evident in tomorrow's release of the flash PMIs for July.”

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Sterling Forecasts