Home Daily Commentaries Risk appetite returns to the market as the pound benefits

Risk appetite returns to the market as the pound benefits

Monday 5 December, 2022

Daily Currency Update

The pound spent much of the last week on the front foot, particularly against the US Dollar as risk appetite returned to the market. With easing around China's covid policies helping sentiment around a return to normal global supply chains, the recent benefactor of global risk aversion, the US dollar, struggled, whilst currencies such as the pound and Euro benefitted. Inflation forecasts in the UK have undershot recently, and there are talks that recessionary fears in the UK may not be as bad in 2023 as once forecasted. The pound has also benefitted from a more stable political situation than that of September, however, there are still many uncertainties for the currency. The markets are forecasting that the Bank of England may have to consider cutting interest rates in 2023, with inflation not expected to peak as high as once thought, and UK households going through turmoil with spiralling living costs. With mortgage costs also on the rise, analysts forecast that the UK central bank may have to reconsider its strategy next year in order to reduce pain on households.

Key Movers

The US Dollar was one of the worst-performing currencies last week within the G10 group. Despite a stronger-than-expected non-farm payroll number, the US dollar spent much of the week on the back foot, losing almost 2% against the likes of the EUR and GBP by end of play Friday. Yesterday, several cities in China decided to ease coronavirus curbs with Urumqi, the capital of the Xinjiang region, saying that shopping centres, restaurants, and markets will open from today. Zhengzhou residents will not be required to show COVID test results to take public transport, and taxis and to visit public areas. Officials also announced that people living in Nanning will not have to provide a negative COVID test to take the subway. With this news helping risk sentiment improve, the US dollar starts this week on the weaker foot, with analysts suggesting 1.24 could be tested this week. The GBP and USD is now trading in the 1.22 level for the first time in almost four months trading briefly above 1.2300, a nearly six-month high on the 1st of December. However, according to ING, the pair could trade back down toward 1.1500 levels around the turn of the year, especially after upbeat US Nonfarm Payrolls helped improve sentiment around the US economy. European Central Bank’s Villeroy stated yesterday that he is in favour of a 50-basis point hike to 2% at the ECB’s board meeting on December 15th. He also said in an interview with LCI television that he expects inflation will peak in the first half of next year and that he cannot say when rate hikes will stop after December 15th. The Euro has been the benefactor around hawkish expectations of rate hikes in the Eurozone, however with the pace of inflation potentially easing, there could be a shift in this sentiment in the coming weeks.

Expected Ranges

  • GBP/USD: 1.2180 - 1.2305 ▼
  • GBP/EUR: 1.1560 - 1.1710 ▲
  • GBP/AUD: 1.7920 - 1.8175 ▲
  • EUR/USD: 1.0465 - 1.0610 ▲