Currency Note

Sterling’s losses stabilise

By Alex Bennett January 25th, 2022

While Boris Johnson’s perilous premiership may be obsessing the British public and media, it’s European peace being on the line in the Ukraine that has sent stocks – and sterling – down at the start of this week.

The issue is not just potential conflict, but also the effect of economic sanctions that could be imposed on Russia, and potential disruption to Europe’s gas supplies from Russia, that sent stocks crashing yesterday.

Sterling fell sharply over the day yesterday, dropping by at least 0.5% during the course of the day against the euro.

Against the US dollar, sterling weakened by almost one cent yesterday and is now roughly 2% off its highest point this year, albeit still up on the month.

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GBP: Sterling balanced as threats grow

So far this morning, yesterdays losses against EUR and USD have been slightly pared back, but the last fortnight’s fall has returned GBP/USD below its average for the past year.

Yesterday’s flash reading for Markit PMI in January came in slightly under expectations at 53.4 for Composite, 56.9 for manufacturing and 53.3 for services, while Germany thrashed expectations, helping to push GBP/EUR down to a three-week low.

This morning we’ve heard that public sector borrowing was below expectations in December. At midday we’ll hear about CBI industrial trends and business optimism.

It is, on the whole, a quiet week for economic data, one in which politics and international affairs are perhaps more likely to affect the markets.

GBP/USD past year

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EUR: Euro rises then falls as optimism tested

The single currency had a mixed day yesterday, strengthening sharply in early trading against both GBP and USD but those gains being pulled back since.

Despite war brewing on the outer eastern edge of Europe, with the risk to power supplies if the conflict escalates, business expectations in the form of Markit PMI was high in Germany in January, hitting 60.5 for manufacturing – well ahead of forecasts – if more muted elsewhere in the eurozone.

Later today German optimism will be tested again with the Ifo Business Climate reading at 10am UK time, then GfK Consumer Confidence on Thursday.

USD: Dollar moves up ahead of Fed decision

The dollar strengthened sharply against the pound and euro yesterday, and has largely held onto those gains this morning.

The dollar is in a push-me pull-me mode as traders balance current performance with future risk.

The Ukraine crisis is encouraging a risk-off mode, whereby traders seek safer assets in a time of crisis. On the other hand, the Omicron crisis is beginning to wane.

Tomorrow we will hear the Federal Reserve’s interest rate decision at 8pm UK time, and this afternoon we’ll hear about house prices.

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