Bullish bias intact but volatility likely to come

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– GBP / EUR volatility may increase after general RMB gains
– Disruption of the automatic stabilizers of the RMB, could attract the action of the PBoC
– May result in mitigation offers for CFETS FX inc EUR, GBP et al
– As the USD causes headaches for central banks at all levels

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  • GBP / EUR reference rate at publication:
  • Spot: 1.1638
  • Bank transfers (indicative guide): 1.1330-1.1412
  • Specialist money transfer rates (indicative): 1.1448-1.1560
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The exchange rate of the pound against the euro could be volatile with an upward bias this week if a recent widespread rise in the renminbi’s exchange rates causes the People’s Bank of China (PBoC) to buy currencies other than the dollar in order to repel the pressures to appreciate the dollar.

The pound was up 0.2% and above 1.16 against the euro at the close of last week following remarks by Gertjan Vlieghe, outgoing member of the Monetary Policy Committee at the bank of england (BoE), who said in a speech Thursday that interest rates could rise at the BoE as early as the middle of next year.

“A lot of good news is included in the price. Yet at least the good news keeps coming. The latest nugget was the Lloyds Business Barometer for May, which peaked in three years, with economic optimism at its highest level since 2016, ”said Daragh Maher, Head of FX Strategy, US at HSBC.

There is not much on the domestic economy side to influence the pound-to-euro exchange rate further in the coming days, unless BoE Governor Andrew Bailey has something to say about it. interesting to say in a 4:00 pm speech Tuesday titled “Building a Responsible Financial System for a Clean, Resilient and Fair Future.”

Either way, a calm domestic scene doesn’t necessarily mean the Pound won’t be both rising and falling at times during what could be a volatile week for the currency market as a whole; Not if last week’s price action on all renminbi exchange rates causes the PBoC to act.

GBP to EUR per day

Above: Pound to Euro rate shown at daily intervals alongside the GBP / USD pair.

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For those who missed it, China saw big gains on just about all of its exchange rates following an apparent move to allow the USD / CNH to fall in a way that it already could have if the PBoC hadn’t spent that long trying to keep it on top. the benchmark level 6.40.

“While there appears to be broad acceptance of a weak dollar among investors, we do not detect such a resounding consensus on China’s economic fundamentals in terms of the ability to cause the RMB to appreciate (other than ‘they are doing well “)”, said Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

The move came amid concern in Beijing over rising dollar-denominated commodity prices and may have been motivated by a desire to offset that increase with a stronger exchange rate, although this has resulted in increases in other Chinese exchange rates that constitute a macroeconomic trap for the PBoC.

Quotes in RMB

Above: quotes and performance of the renminbi exchange rate over selected time periods.

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GBP / EUR Forecast 2021

Period: From the second quarter of 2021
Details: Consensual institutional provisional objectives + max and min objectives.
Contributors: Citi, Barclays, Morgan Stanley and more
Provider: Global reach
Type: Free download
Please access here

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GBP / USD Forecast 2021

Period: Q2 2021
Details: Institutional consensus provisional objectives + max and min objectives.
Contributors: Citi, Barclays, Morgan Stanley and more
Provider: Global reach
Type: Free download
Please access here

After combining with continued weakness in other key segments of the currency market, the drop in the USD / CNH last week had the effect of pushing the renminbi higher against all currencies in the Chinese trading system. (CFETS) and at a time when the renminbi was already at three highs for the year in trade-weighted or aggregate terms.

“We’re also looking at the CNY / JPY cross – it’s up 15% since last summer. Japanese policymakers will be happy, Chinese policymakers less, ”said Chris Turner, Global Head of Markets and Regional Head of Research at ING.

Widespread renminbi gains are problematic for the PBoC because they make imported goods cheaper to buy and with other types of inflation being too low for the PBoC’s policy goals, these gains could cause the bank to buy. other currencies in order to reduce its other exchange rates.

CFETS basket

Above: basket of currencies from the China Foreign Exchange Trade System index.

“We’ll always be on the lookout and think that the appreciation of the RMB (or a prolonged period of dollar weakness) could easily become a headache for policymakers. We expect additional administrative tools to be deployed by the PBoC until the late 1930s, ”says Gallo of BMO.

For those who missed it, China saw big gains on just about all of its exchange rates following an apparent move to allow the USD / CNH to fall in a way it already could have if the PBoC hadn’t spent that long trying to keep it on top. the benchmark level 6.40.

In Europe, the most important currency within the global CFETS index, which is the basket against which the renminbi exchange rates are measured and sometimes managed, is the euro and it would therefore be the main recipient in Europe of any attempt by the PBoC to push the extremes. currency appreciation.

The GBP / EUR pair has often performed well as the EUR / USD pair rises wherever the single currency has risen during periods when the European Central Bank (ECB) is pessimistic about its economic and inflation outlook: this is when it is most often heard pushing back the currency’s strength.

However, anything that would cause the euro to appreciate on its own would be a downside risk for the pound to euro rate.

“Wednesday will see the ECB publish a report on the international role of the euro. These usually look at the role of the euro in things like foreign exchange reserves, billing and debt issuance, ”says ING’s Turner.

“We would expect to see further advance of the euro in all of these categories – aided by the use of sanctions by President Trump and the US Treasury, and by the rest of the world trying to break free from dollar hegemony. The report could launch bullish headlines for the euro.

CFETS to RMB

Above: Renminbi Vs CFETS index currencies.

For the background of readers; China operates a managed floating exchange rate regime.

This means that the renminbi’s exchange rates reflect market supply and demand, but with the PBoC engaging where China’s macroeconomic and financial stability needs require; or otherwise for reasons related to China’s international responsibility as a big economy.

“Market supply and demand are [an] important reference. The floating and flexible exchange rate is the result of these two factors combined with necessary management, ”writes a guest commentator on the Chinese Foreign Exchange Trading System (CFETS) website in December 2015, when the CFETS index was first launched.

It’s no secret and it doesn’t need to be controversial as the market is a no man’s land that necessarily serves the currencies, economies and countries of the world, all of which have different cultures and customs.

Nonetheless, it could matter a lot in the coming week and because of the impact that US policies are having on the dollar.

An “America First” monetary policy in Federal Reserve (Fed) is sponsoring a new Corbynite White House something like a magical money tree, which has driven a tidal wave of capital away from the dollar in horror over the past year.

The dollar was already on the verge of becoming a problem currency again even before the pound or any other currency entered 2021: and if this reality is not treated with great care, it could very easily take over the world. in what many experts like yours would really inevitably call a “currency war”.

For more information, readers might do worse than take a look at the following:

The untold story of Pound Sterling’s Steamrolling Rally

British pound in central bank offer as People’s Bank of China considers win-win cooperation

The US dollar is on the verge of becoming a problematic currency again

Currency wars are real and the BoJ is assembling a new rifle

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