Euro, US Dollar and British Pound Outlook: Easing in Risk Sentiment Could Spell GBP Gains

Investor risk sentiment is improving thanks to the ECB, who hinted at more monetary easing as early as March. The news could be good for the pound sterling while weighing on the euro.

In the short-term high risk currencies are likely to be better supported then their safe haven bretheren. 

On the ‘risk gradient’ the pound sits above both the US dollar and euro, so its star could be rising whilst the other two's may be setting.

Therefore, if markets are going to rise we would expect a better performance from the British pound against both the euro and dollar while higher-risk currencies such as the Australian and New Zealand dollars should fare even better.

Exchange rates at the start of the week

Pound to euro: Market = 1.32, Bank = 1.2834, Independent = 1.3046. 
Pound to dollar: Market = 1.4255, Bank = 1.3856, Independent = 1.4084. 
Euro to dollar: Market = 1.0797, Bank = 1.0374, Independent = 1.0721. 

US Dollar Outlook

Interest rate policy in the United States dominates the agenda for the Greenback.

The Fed is widely expected to make no changes in its meeting this Thursday.

The FOMC statement will be scrutinised in search of clues about the path of future rate hikes.

“We see downside risks for USD versus high beta currencies this week due to further short squeeze in risky assets. Expectations of an easier monetary policy stance in the euro area in the near future should continue supporting risky assets in the near term,” say Barclays in a foreign exchange note to clients.

Barclays confirm that commodity and emerging market currencies and risky assets should find some support while EUR should continue with downward pressure.

The pound to dollar exchange rate has recovered lost ground over recent days, but we are hearing some big-name strategists are looking to sell the GBPUSD on strength in anticipation of a resumption of longer-term downside.

Euro Outlook

The pound to euro exchange rate recovered lost ground over recent days.

The EUR weakened last week as the ECB’s Governing Council unanimously agreed to review and reconsider policy at the March 10 meeting.

Although the outcome of the meeting was more dovish than markets had previously envisioned, given that the ECB had eased policy in December, strategists at Barclays say they are not surprised by the ECB’s course of action given the soft inflationary environment and the material deterioration in medium- and longer-term inflation expectations.

“Indeed, we take the January ECB meeting to be a strong signal towards future action at the March meeting and think a 10bp deposit rate cut or additional QE is feasible (see ECB: Leaning towards further easing in March, 21 January 2016),” say Barclays.

A move back to trading fundamentals errs on the side of EURUSD downside, also in the context of underpriced Fed rate hikes this year.

“Yet, EURUSD puts look historically cheap relative to calls across the curve, offering a compelling opportunity to express downside through options,” say Barclays.

British Pound Outlook

Despite another round of uninspiring data, the GBP finally saw a rebound last week following a more dovish ECB press conference.

“We have highlighted the risk for a EURGBP reversal over the past two weeks as momentum indicators were indicating oversold GBP conditions,” say Barclays.

Will the rebound continue or will a refocus on Brexit risks and the Bank of England’s reluctance to raise interest rates weigh once more?

Barclays say they expect to see the euro to pound rate move lower this week, “and see scope for a further move lower in the near term, given the rapidity of the move to the topside and increased market pricing of additional ECB easing in the coming months.”

The same goes for the pound to dollar rate:

“Although we continue to look for trend depreciation in GBPUSD, we think that a further near-term correction is likely as the market looks for better levels to re-engage in core GBPUSD downside positions ahead of the UK referendum later in the year.”

Furthermore, Barclays believe markets are far too pessimistic on the market’s pricing of the first Bank of England interest rate rise.

“Our revised timing of BoE lift-off (Q4 from Q2 previously) however, continues to represent upside risks to our GBP view in the context of extremely dovish market pricing,” say Barclays.

Risks are to the upside.

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