Expectations Of Sunak Coronation Crucial For Pound Vs Euro, Dollar

24.10.22: Expectations of Sunak Coronation Crucial for Sterling and Euro Moves against and Dollar

Fear has been in the ascendency in global markets over the past few weeks. Equity markets have remained under pressure amid a jump in US bond yields and expectations of further aggressive Federal Reserve rate hikes.

Confidence in the global economy has also deteriorated.

The latest commentary from the Fed has triggered a significant element of relief and sparked gains in equities.

There will be optimism over the outlook if markets can look forward to improved conditions next year.

After weeks of UK political drama, hopes for relative stability have improved following expectations that former Chancellor Sunak will be installed as new Prime Minister on Monday without a membership ballot.

The turmoil in UK bond markets has been a key element unsettling global confidence and any relative return to domestic stability would also provide global relief.

There will still be reservations over the Chinese economy, limiting any scope for improved sentiment.

Pound US Dollar Exchange Rate Outlook

The Pound to Dollar (GBP/USD) exchange rate has been subjected to very high volatility.

Sellers easily dominated for the first half of Friday with GBP/USD sliding to lows at 1.1075 amid intense political uncertainty and weakness in global equities.

The strong recovery in equities and dollar reversal triggered a strong reversal with gains to 1.1300 and Johnson’s decision not to stance in the Conservative leadership contest also triggered a further recovery to highs above 1.1400 on expectations that former Chancellor Sunak will be installed as new Prime Minister.

Political developments will continue to be watched very closely on Monday. If Mordaunt is unable to gain enough backers by the US open, Sunak will be confirmed as the new Prime Minister with no membership vote.

If so, his decision whether to keep Hunt as Chancellor will be very important for market sentiment.

GBP/USD is liable to dip if the contest does go to a membership vote.

The latest UK business confidence data will also be important for confidence in the UK outlook.

Overall trends in risk appetite will also be important for GBP/USD moves with potential selling on any further relief rally to 1.1500.

Euro (EUR) Exchange Rates Today

The Euro moves have been dominated by trends in global risk appetite.

The Euro to Dollar (EUR/USD) exchange rate was subjected to strong selling on Friday with a slide in equities triggering losses to near 0.9700.

There was a sharp recovery after the US open as EUR/USD recovered strongly to near 0.9850 as equities reversed to post a strong advance.

Overall confidence in the Euro-Zone outlook remains very fragile and there will be further unease over Ukraine developments, especially with Russian talk of a dirty bomb.

The latest Euro-Zone business confidence data will also be important for Euro confidence.

EUR/USD will have scope for gains if equity markets continue to make headway, but gains are still likely to be limited at this stage unless there is much better than expected Euro-Zone data.

US Dollar (USD) Exchange Rates Outlook

The US dollar posted strong gains ahead on Friday’s US open with the Dollar to Yen (USD/JPY exchange rate surging to fresh 32-year highs near 152.00.

The Bank of japan intervened to support the yen which triggered a very aggressive dollar sell-off as USY/JPY slumped to lows below 147.00.

The impact of intervention was magnified by a shift in market expectations surrounding Fed policy.

San Francisco Fed President Daly stated that she wants to avoid an unforced tightening by over-tightening and that the central bank is now at the stage where it needs to be thoughtful. She added that the Fed also needs to take account of synchronized global central bank tightening.

The comments triggered increased speculation that the Fed would be more cautious which undermined the dollar.

Nordea is skeptical that Bank of Japan intervention will trigger more than limited dollar losses and could even prove counter-productive.

It notes; “To sum up, the FX intervention whereby countries are actively intervening to prop up their currencies against the USD may dampen the strengthening of the USD in the short to medium term. But countries do not have an endless amount of USD at disposal to sell, meaning that the FX intervention will fail when their USD coffers run dry.”

It added; “Moreover, FX intervention involves selling of US Treasuries, which adds upwards pressure on US rates and leads to a stronger USD in isolation.”

Other Currencies

The Japanese yen has been subjected to very volatility following the Bank of Japan move to intervene to support the Japanese currency.

From highs above 169.50 on Friday, the Pound to yen (GBP/JPY) exchange rate posted very sharp losses to below 165.00.

There was further very choppy trading on Monday with GBP/JPY settling just below 169.00 from lows around 165.50.

The Pound to Swiss franc (GBP/CHF) exchange rate strengthened to 1.1360 before settling around 1.1325.

Overall Sterling volatility has also been intense, especially with sharp shifts in risk appetite and political developments.

The Pound to Australian dollar (GBP/AUD) exchange rate posted 1-week lows around 1.7675 on Friday before a strong recovery to 1.7910.

From 1-week lows near 1.5310 the Pound to Canadian dollar (GBP/CAD) exchange rate also jumped to 1.5540 on Monday.

The Pound to New Zealand dollar (GBP/NZD) exchange rate dipped to 2-week lows near 1.9560 before a rebound to near 1.9800.

The Day Ahead

As far as data releases are concerned, the latest PMI business confidence data for the UK, Europe and US will be important for expectations surrounding the global economy.

Weaker than expected overall data would increase concerns over the outlook and tend to undermine risk appetite. The relative outlook will also be important for exchange rates.

The Bank of Japan will be very important for exchange rate moves following the intervention to support the yen on Friday and Monday.

Moves in US bond yields and speculation over Fed policy will remain extremely important. Although there are no scheduled speakers due to the Fed being in a blackout period ahead of next week’s policy decision, markets will be on alert for unofficial briefings.