Image © Adobe Images
Pound Sterling is looking better supported from a technical perspective.
The Pound to Euro exchange rate (GBP/EUR) fell sharply last Friday but is looking better supported this week, suggesting the selloff might have been a one-off.
To be sure, the exchange rate hasn't fully reversed the near-1.0% daily drop that took it to 1.1455, but that there is no follow-through selling this week will encourage those looking for higher rates.
The low at 1.1455 is higher than the previous low set at 1.1421 on July 28, meaning we could be looking at a sequence of 'higher lows'. From a technical perspective, this simply signals that the rundown that we saw in July might have ended, paving the way for higher levels in August.
Above: GBP/EUR snaps a pattern of 'lower lows'.
Firmer technicals would be consistent with a view that the Pound can put in a spell of outperformance in the coming one to two months ahead of a potentially difficult autumn in which focus will turn to the budget, UK debt and tax hikes.
"We retain a constructive view on GBP into year-end. We concede that view is increasingly out of consensus (Exhibit 1), but we stick with our lower EUR/GBP conviction as we think the UK has emerged from the tariff tumult in a better position than the Eurozone," says Kamal Sharma, FX Strategist at Bank of America.
The short-term recovery of Monday and Tuesday also comes as investors prepare for Thursday's Bank of England decision. The gains corroborate views that there is little leeway for the Bank to deliver the kind of decision and guidance that would be consistent with a weaker Sterling.
As we note in this article, for GBP to weaken materially, the Bank would need to guide the market to an additional three more rate cuts beyond Thursday's 25 basis point reduction. Economists we follow warn that such a deep path of cuts would risk stimulating inflation, which is already rising again.
Gains by Sterling - which is up against most peers at the time of writing Tuesday - could be the market's effort to front-run Thursday's decision.
Another crucial component to the stability is the performance of global stock markets; having received a beating following Friday's shockingly weak U.S. payroll report, investors adopted a more benign view after a weekend break.
After all, a weak labour market will invite the Fed to cut rates, which will underpin stocks.
Regular readers will know Pound-Euro is highly sensitive to global market volatility, meaning it tends to struggle when markets are fearful. Becalmed stocks will therefore make for smoother sailing for the Pound.