26/02/2021

Sterling suffers its sharpest decline of the year


GBP

The pound has been the best  performing currency of 2021 but it has suffered its sharpest decline of the year in response to a shift in risk status. As demonstrated by the pound’s performance in the last few months, it has adopted a ‘risk on’ status and is susceptible to risk reversals if the global mood shifts to negative.

The pound has behaved in correlation with the mood of the global investor community and this sentiment deteriorated in the late part of yesterday and overnight as global stock markets dropped as safer U.S. bonds shot up. The sell-off in bonds has triggered a stampede out of stocks and has caused worries about the overall global economic recovery.

The yield on U.S. ten year bonds has risen in the last 24 hours, and this suggests that investors are concerned that inflation will rise sharply over the coming months as economic growth returns. In theory, this could lead on to central banks to exit their large scale quantitative easing programmes and look at raising interest rates. This central bank stimulus has previously aided Sterling against its G3 peers, it is now possible that the pound has been trading beyond its means and this correction is overdue.

USD

President Biden’s large economic stimulus plan hit a snag yesterday after the Senate parliamentarian disqualified the hike in the minimum wage from the bill. Elizabeth MacDonough ruled that a hike cannot be included in the overall package. This not only increases the prospects of another delay to this economic aid package, it has also coincided with investors beginning to reprice the likelihood of a rate hike by the Federal Reserve.

Economic Calendar

13:30- EUR: German Harmonized Index of Consumer Prices (YoY) (Feb); expected to decrease to 0.5% from previous 1.5%
15:00- USD: ISM Manufacturing PMI (Feb); expected to decrease to 58.6 from previous 58.7


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