Currency Market Analysis


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May 11, 2021 | Currency Market Analysis

Global Themes

Pound climbs to near 3-month high

• Sterling’s best day in seven months
• Inflation fears resurface, sentiment shifts
• Is EUR/USD poised for further upside?

GBP

Sterling’s best day in seven months

The British Pound accelerated through the $1.41 barrier yesterday to end over 1.2% higher against the US dollar – scoring its best daily performance in almost seven months. GBP/EUR also notched its best day of 2021, spiking through the €1.16 threshold and holding above.

Sterling’s rally was fuelled by a mix of improved economic forecasts, lockdown easing measures, and market calm about the outcome of the Scottish election over the weekend. The election risk was hanging over sterling last week, but investors don’t interpret the threat of another independence referendum as a near-term risk due to the Scottish National Party failing to win an outright majority. Meanwhile, UK lockdown restrictions continue to ease, boosting hopes of a massive recovery in the services sector this quarter and throughout the rest of the year – providing further support to sterling.

• First quarter UK GDP results are released early tomorrow morning as traders eye 2021 highs of circa $1.42 and €1.18 against the dollar and euro respectively.

Inflation

Inflation fears resurface, sentiment shifts

Equities are sliding as surging commodity prices globally are reigniting inflation fears. Copper prices, a strong barometer of global growth, surged to new record peaks and iron futures powered more than 10% higher. Demand for pro-cyclical currencies remains firm with the AUD, NOK and ZAR modestly outperforming GBP this morning.

Sterling’s correlation with stock indices is less strong than it was throughout 2020. That said, the reversal in equity markets overnight have tempered sterling’s jubilant start to the week. investors are being driven away from growth stocks – most notably tech stocks – as sustained inflation becomes a growing concern. Major central banks currently view inflation as transitory, but the market view is mixed. Citigroup’s emerging-market surprise inflation index rallied to its highest level since 2008 last month as attention turns to some big inflation releases from Brazil, China and India this week. The consumer price index report from the US will also be released tomorrow afternoon.

• If inflation continues to overshoot expectations, a rotation away from growth stocks and riskier assets could trigger a rise in demand for the safe haven US dollar, particularly if US Treasury yields resume their recent ascent.

EUR/USD

Is EUR/USD poised for further upside?

The most traded currency pair in the world has benefited recently from upside momentum with the short-term charts pointing higher. The relative strength index on the daily chart has also exited overbought conditions, suggesting more gains could be available for the euro against the dollar.

EUR/USD is positioned almost 4% above its year-to-date low of $1.17, which traded back in late March when US Treasury yields rose amidst inflation fears and speculation about monetary tightening. The US Federal Reserve has since cooled those concerns, reiterating its supportive stance for financial markets and the US economic recovery. Meanwhile, the trade-weighted dollar is currently located just above an upward trend line that has been ongoing since 2011, so there is an argument that the dollar is at a pivotal point. A break below this level could trigger deeper losses and allow EUR/USD to challenge new 3-year highs closer to $1.25.

• If such a shift higher were to unravel in EUR/USD, then knock-on effects across other currency pairs can be expected, GBP/USD would likely climb higher, but GBP/EUR upside traction could be limited. German ZEW sentiment surveys will be released this morning and could influence short-term euro price action.

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