- Markets in recovery mode
- Currencies react to improved sentiment
- GBP advances on EUR and USD
- "Recovery should still continue, but expectations are moderating" - CIBC
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- Market rates at publication: GBP/EUR: 1.1605 | GBP/USD: 1.3680
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Pound Sterling looked to put a multi-day losing streak behind it on Wednesday, aided by an improvement in global risk sentiment.
A recovery in stock markets signalled investors might have set aside recent concerns linked to the rapid spread of the Covid-19 Delta variant which threatens to slow the global economic recovery.
We noted recently that when investors are fearful the Pound tends to decline in value against the Euro, Dollar, Franc and Yen but gain against Emerging Market currencies as well as so-called commodity currencies such as the Krone, Australian, Canadian and New Zealand Dollars.
"The apparently sudden explosion of Covid-19 Delta variant risk to the status of “top concern” for global markets is this week’s key story," says Shahab Jalinoos, a foreign exchange trading strategist with Credit Suisse.
"It is still possible that the high rates of Covid-19 infection do not translate into hospitalisation rates that force a reversal of economic re-opening," he adds.
The Pound-to-Euro exchange rate rose 0.20% to trade at 1.1593, meanwhile the Pound-to-Dollar exchange rate rose 0.13% to 1.3650.
Above: The Pound has recovered some lost ground over recent hours.
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"European indices are sharply higher, recovering from a tough few sessions, led by the FTSE 100, which has managed to top the 7000 level once more. If Monday does turn out to have been a sudden summer squall the strength of this current bull market will be reaffirmed once again," says Chris Beauchamp, Chief Market Analyst at IG.
Expect the risk-on / risk-off (RORO) theme to dominate markets over coming days and expect risk-on assets such as stocks and commodities to rise if investors further set aside fears concerning a global jump in Delta cases.
"RORO has become increasingly dominant again. For much of the last year, that dominance has been GBP-positive but current fears (however fleeting) are keeping GBP on the back-foot," says Daragh Maher, Head of Research, Americas, for HSBC.
Above: The Dow Jones stock index was in recovery mode Wednesday.
"Investor risk appetite continues to rebound from Monday's pullback, but the more positive sentiment has only slowly filtered into FX markets," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.
Markets have this week taken fright over the rise in global Covid-19 cases, driven by the Delta variant of the disease which appears to be significantly more transmissible than predecessors.
This means that even countries - such as the UK - with high levels of vaccination penetration are unable to escape a new wave of infections.
Above: Delta has quickly come to dominate the landscape. Image courtesy of Our World in Data.
The developments surrounding this new phase of the pandemic will likely subdue the economic rebound in the Eurozone, UK and U.S. over coming days and weeks.
Investors are of the view that Developed Markets can withstand a new wave of infections in the hope that vaccinations sever the link between cases and hospitalisations, but for those countries where vaccination penetration is low the need for more stringent mitigation measures are required.
South East Asia and Australia are of particular concern: this region weathered the Covid storm in 2020 but the Delta variant is proving harder to escape.
Expect markets to remain volatile as the investors grapple with incoming infection data from around the world.
"Higher equity markets and US Treasury yields overnight point to a further revival in risk appetite, but one that is not being fully embraced by FX," says Maher.
There is therefore scope for currency markets to play catch up with the improved sentiment being reflected in other asset classes and those watching for higher Pound exchange rates will hope this is indeed the case.
"The recovery should still continue, but expectations are moderating a bit. That’s what was behind the defensive behaviour in risk assets in prior sessions," says Bipan Rai, North America Head of FX Strategy at CIBC Capital Markets. "I don’t think market defensiveness will extend as positioning becomes more balanced."
IG's Beauchamp says should the recent market dip prove to be a temporary phenomenon it will bolster the ongoing parallels with 2013 and 2017, "which both followed on the heels of volatile years but were themselves examples of quiet but relentless equity market rallies".