IFX Market Report: Thursday 28th January 2021

The Pound experienced heightened volatility in yesterday’s session as investors “risk-off” sentiment led to sharp losses in equity and commodity markets, causing a disturbance in the foreign exchange market. The risk off tone did little to help support Sterling or the Euro, but the U.S. Dollar was able to make an impressive comeback. The Dollar’s newfound vigour caused GBPUSD to erase all of its 2021 gains in a matter of hours.

Cable started Wednesday’s session trading comfortably above 1.37 at 1.3735. As market sentiment turned, Sterling’s performance deteriorated and GBPUSD depreciated all the way to 1.3687, where it finished the day.

EURUSD also lost ground yesterday as the Greenback applied the pressure. The pair opened Wednesday at 1.2147 and after a choppy session, closed at 1.2100.

In contrast to cable, GBPEUR had an exceptional day, reaching highs not seen since May 2020. After opening at 1.1307 the pair went as far as 1.1347 in session, before closing the day off at 1.1312.

When looking at the performance of the Pound versus the Euro, it is important to appreciate the three main factors driving valuations: relative economic growth, interest rate differentials and current account balances. On economic growth, evidence would suggest the UK will be in the lead here. Although “the euro area economy weathered the 2020 crisis rather better but 2021 is shaping up differently”. Europe’s slow roll out of the COVID-19 vaccination may prove to be devastating to an economic recovery. As for interest rates, “the Bank of England has so far wisely resisted dipping into negative territory, leaving clear blue water between it and the European Central Bank”. Lastly, “Europe has a big current account surplus and Britain a deficit, but any change in the balance — from domestic tourism, for instance — would support the pound”. Taking the above into consideration, the current environment supports GBPEUR bulls.

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