Risk Conditions Continue to Dominate, Pound to Euro Rate Rallies

August 11, 2024 - Written by David Woodsmith

STORY LINK Risk Conditions Continue to Dominate, Pound to Euro Rate Rallies

Global risk conditions and equity markets continue to dominate global markets. In essence, the Pound will tend to strengthen when conditions improve while there will be renewed selling when fear dominates. Domestic influences remained limited at this stage.

Sentiment has improved on Wednesday with a pause in the liquidation of carry trades funded through the yen while equities have rallied.

In this environment, the Pound to Euro (GBP/EUR) exchange rate has recovered to 1.1635 after dipping to near 3-month lows close to 1.1600 on Tuesday.

Global risk conditions and developments surrounding carry trades will continue to dominate GBP/EUR moves in the short term.

Bank of Japan Deputy Governor Uchida indicated that the central bank would not increase interest rates further while market volatility was elevated.

These comments triggered renewed yen selling and helped underpin the Pound in global markets.

There was still a high degree of uncertainty whether it was a turning point or a temporary reprieve.

UBS macro strategist Malcolm commented; "I’d guess the carry trade is only about 50% unwound.”

He added; “How much the carry trade could unwind depends not so much on the level of the interest rate differential but the change in the interest rate differential. Comparing the current move with the carry trade unwind of 1998 suggests more unwinds could be ahead.”

Scotiabank’s chief currency strategist Osborne added; "The adjustment in carry positioning over the past few weeks has been rapid but it may have further to run.”

Looking at CFTC data he added; “The report “is a small window on FX positioning but the data along with the (so far) relatively limited correction in carry trade index returns suggest that there is more room for the carry trade to unwind in the short run."

Domestically, Halifax reported that house prices increased 0.8% for July after no change in June and compared with consensus forecasts of 0.2%.

Prices increased 2.3% over the year and the strongest reading of 2024.

Amanda Bryden, Head of Mortgages, commented; “Last week’s Bank of England’s Base Rate cut, which follows recent reductions in mortgage rates, is encouraging for those looking to remortgage, purchase a first home or move along the housing ladder. However, affordability constraints and the lack of available properties continue to pose challenges for prospective homeowners.”

She added; “Against the backdrop of lower mortgage rates and potential further Base Rate reductions, we anticipate house prices to continue a modest upward trend throughout the remainder of this year.”

German industrial production increased 1.4% for June after a revised 3.1% decline previously and slightly stronger than the expected 1.0% increase.

There was, however, a 3.4% monthly decline in exports after a 3.1% slide in June.

ING commented; “Looking ahead, with both the US and the Chinese economies losing momentum, along with new trade tensions, there is very little hope for a strong export-driven recovery.”

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TAGS: Pound Euro Forecasts