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- Market rate at publication: GBP / EUR: 1.1660 | GBP / USD: 1.3766
- Bank transfer rate: 1.1430 | 1.3480
- Specialized transfer rates: 1.1580 | 1.3670
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A global stock market sell-off portends a deterioration in investor sentiment, the effect of which is reflected in the forex markets where the pound is losing value against some of its major peers.
Investors were reducing exposure to equities, commodities and “asset risks” amid “greater unease over the prospects for global growth,” said Lee Hardman, currency analyst at MUFG.
The FTSE 100 index was down more than one percent, the German Dax by 0.80% and the Dow Jones futures were down two-thirds of a percent.
The forex market reaction saw “havens” such as the yen, franc and dollar bought as one would expect.
“The JPY and CHF are the top performing major currencies. Concerns about the outlook for global growth weigh on sentiment in financial markets, with equity markets falling sharply,” said Elias Haddad, senior currency strategist at Commonwealth Bank Australia.
The laggards were those very sensitive to global sentiment, including the Australian, New Zealand and Canadian dollars.
“The US dollar continued to trade on a stronger basis overnight, particularly against the commodity-linked G10 currencies Australian dollar, Canadian dollar, New Zealand dollar and Norwegian krone. “said Hardman.
Quotes courtesy of IG.
At the center of this risk matrix is the pound which lost ground against safe havens but gained against “high beta” commodity dollars and emerging market currencies.
The pound-dollar exchange rate fell a quarter of a percent to 1.3764 while the pound-euro exchange rate fell a third of a percent to 1.1663.
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“The optimism of market participants for a robust global recovery is currently being tested by the continued spread of the new Delta COVID variant which has the potential to disrupt economic activity, particularly in countries where the deployment of the vaccine was slow, ”Hardman said.
The analyst adds that economic indicators are starting to indicate that the peak pace of economic recovery in the United States and China, which led the global recovery, has already passed, and that growth momentum is starting to slow.
“The Chinese economy has already slowed throughout the first half of this year, as it looks like the second quarter will be the best quarter of growth for the US economy,” Hardman said.
Apparent change in the United States is at the root of investor worries Federal Reserve – albeit slow – towards a tightening of monetary conditions in the United States
The Fed published minutes of their June night political meeting and they confirmed to the markets that an interest rate hike was likely by 2022.
The minutes also confirmed that talks are underway to end the quantitative easing program that sees the Fed increasing the supply of liquidity to the economy by buying government and corporate bonds.
“Market participants are increasingly wary of the prospect of a stricter policy,” says Hardman.
“We expect the US dollar to remain long in the short term as market participants remain more concerned about the outlook for global growth even as US yields have fallen sharply recently,” he adds.
Those looking for a stronger British Pound against the Euro and the US Dollar and associated “safe-haven” currencies will eventually have to get over the current nerves of the market. However, transactions in Australian dollars, New Zealand dollars and Canadian dollars may now become cheaper.
“I suspect that this latest decision is motivated by the virus. The new delta variant is getting really worrisome, says Marshall Gittler, head of investment research at BDSwiss Holding AG.
Gittler reflects that market concern over the virus can be seen in the relative performance of sectors that are benefiting from the reopening of the economy, such as airlines and hotels.
“Continued deleveraging in the markets, driven by oil and interest rates and spilling over into currencies, despite the overall stability of equities,” says a trader at at JP Morgan London spot trading desk.
“I guess with concerns about supply issues and the delta variant, maybe the summer boom that people expect from growth is being held back or delayed,” the trader adds.