British Pound Tipped to Remain Supported Against Euro as Exchange Rate Markets are not Yet Done with the Trump-Trade

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  • Pound to Euro exchange rate today (29-11-16): 1 GBP = 1.1752 EUR, week’s low: 1.1673, week’s highest: 1.1779
  • Euro to Pound Sterling exchange rate today: 1 EUR = 0.8510 GBP, week’s lows: 0.8497, week’s highest: 0.8567
  • Euro to Dollar exchange rate today: 1 EUR = 1.0605, week’s low: 1.0563, week’s highest: 1.0686

Global foreign exchange market dynamics remain in the driving seat for Pound Sterling with the key question being how much longer can the pro-GBP Trump-trade last.

Sterling was the day’s worst-performing G10 currency on Monday as a retracement in the currency’s rally took place.

There were no fundamental drivers for the move but we note market dynamics in place since Donald Trump won the US presidency to be the invisible hand guiding the Pound this month.

The great November Trump-Trade shifted focus away from Brexit and allowed the Pound to move higher as traders predicted a new world order of stronger growth and higher inflation which saw stock markets rally and bond’s slump.

“The revised view of a Donald Trump Presidency is that his fiscal largesse will spur growth in the US for many years to come, hence the rally in stocks and sharp increase in Treasury yields,” says Kathleen Brooks at City Index.

Importantly, these moves were mirrored in UK counterparts which had the most catching-up to do after their Brexit battering.

Gilts fell and Gilt yields surged ensuring Pound Sterling was sent higher as a consequence.

Importantly this pro-GBP dnyamic is forecast to extend by analysts at Danske Bank who in a recent client brief note:

“We expect UK gilt yields, especially in the 5y-10y segment, to increase further over the forecast horizon, driven by higher US yields.”

Furthermore, Danske believe the possibility of a renewed special relationship between the US and UK following Trump’s win, and indications of a ‘softer’ Brexit, have reduced the Brexit risk premium for now which has freed GBP from its recent shackles.

Analysts at Danske have told clients the dynamic should extend for a few more months before fading completely.

There are however risks that the relatively optimistic expectations held by markets concerning the Fed and Trump, coupled with the fact that investors have been large-scale net buyers of USD, also imply a potential for the Dollar plunging if market expectations of Trump policies change.

This will certainly weigh on Sterling.

Indeed, we are aware that the veolicity of the Trump-trade is moderating and that explains Sterling’s recent consolidation.

Brooks believes that overall, the Trump-trade, which has been positive for US stocks, UK stocks, Gilt Yields and therefore the Pound, “could start to slow, but we doubt it will disappear altogether.”

Latest Pound/Euro Exchange Rates
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Pound, Dollar and Euro Correcting

Correction is the buzz-word at present – a correction higher in EUR/USD after its recent pummelling, and a correction lower in an exuberant US Dollar which shot to 14-year highs in the week prior.

Mix these strong dynamics with a dose of Sterling and we get the outcome that is a sideways-orientated Pound-Euro exchange rate.

There really is nothing of note to guide GBP until the PMI data on Thursday and Friday, so it should be influenced by the dynamics of the headline EUR/USD exchange rate and other external drivers.

“Sterling trading will be driven by global factors, as the calendar is empty. Cable might profit from a dollar correction. A rebound of EUR/USD is often also supportive for EUR/GBP and to some extent this might also now be the case,” says Austin Hughes at KBC Markets in Dublin.

That said, at the time of writing in the Pound has pared much of its earlier gains confirming that the Euro remains unconvincing.

Indeed, “given political uncertainty in Europe (Italy), the topside potential of euro is modest,” says Hughes.

EUR/USD had bounced a notable 0.56% at one stage ensuring GBP/EUR was down by similar margins.

However, EUR/USD has faded allowing GBP/EUR back above the 1.17 marker and we are seeing 1.1689 quoted on the inter-bank markets and a range of between 1.1312 to 1.1617 being quoted by banks and independent international payments providers.

Hughes believes while the Euro is showing some tentative signs of bottoming out against the Pound, for now, “there is no a big case for a protracted rebound yet, unless there would high profile negative news from the UK.”

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EUR/USD Relief Weights on the Pound

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As GBP/EUR is now largely a function of moves in EUR/USD the question is how high can EUR/USD go?

There is a chance that the technical recovery could run higher in the near-term ahead of another capitulation.

“For the past week the market has been building for a technical rally. The selling pressure has been showing signs of dissipating and the technical momentum indicators on the daily chart have been looking to improve,” says Richard Perry at Hantec Markets.

The momentum indicators are beginning to pick up with the RSI crossing back above 30 for the first time in two weeks.

“A close above $1.0663 would suggest the technical rally was on,” says Perry. We would need to see a little more way by gains until we turn technically bullish then.

Our own Joaquin Monfort is targetting lower levels in EUR/USD over coming days as he too expects Euro strength to be fleeting.

US Dollar Weakness to be Shallow

For those waiting on a stronger Pound Sterling against the Euro, what will matter is how quickly the Dollar can get back on its feet.

This is in turn dependent on the Trumpeconomics theme – the promised boost to US government spending and the impact it has had on pushing up US stock markets which has in turn seen demand for bonds fall which in turn pushes up the yield those bonds offer.

“We expect a statistical quirk to result in a softer wage growth pickup in Friday’s US jobs report and this may see US yields retreat from their recent highs,” says Viraj Patel at ING in London.

While this would suggest a softer outlook for the US Dollar (and potential for a consolidation of recent gains), “we still think the big picture remains constructive. Look for a fall back in the DXY to 100 as an opportunity to go long,” says Patel.

At present the US Dollar index is located in the vicinity of 101.08 – so we would give the Dollar some further space to weaken but anticipate this weakness to be temporary.

Hence, dips in GBP/EUR may also be temporary.

Analyst Richard Franulovich at Westpac Bank in New York agrees that USD weakness is likely to be brief  given various other tailwinds into 2017:

1) another potential HIA;

2) a more hawkish composition to the Fed’s Board when Trump fills two vacancies; and

3) “EMU break-up tail risks” due to 2017 European elections.

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