Sterling Falls Following Energy Concerns As Rising Yields Support USD

The sterling has fallen sharply today, owing to growing concerns about energy shortages as a result of a post-Brexit scarcity of truck drivers, as well as a suspension of license testing during pandemic lockdowns. Some commodity currencies are being weighed down by mild risk aversion, which began in European markets. Nonetheless, there is no improvement in the Yen’s overall position, which remains weak against other currencies. The rise in US treasury yields is helping the Dollar, while the German yield is also helping the Euro.

Since the EU referendum in June 2016, the GBP/USD trend has been closely related to business confidence and UK inflation trends. Both are rising, reflecting an assessment of future growth dynamics and monetary policy bias. Based on relative growth, the UK’s vaccination rate (66.7%) is better than the United States (55.4%), which shows that considering the spread of Delta, economic activities may have greater flexibility.

As the economy returns to pre-pandemic GDP levels and closes the output gap, we think it is appropriate for the Bank of England to start raising interest rates next year. Given that the sterling is undervalued against the U.S. dollar, we continue to support a moderate appreciation of the pound.

Sterling May Get Weaker Against the USD

The details of the Bank of England’s policy decision, namely the vote on quantitative easing and the comments on when to start raising interest rates, are tougher than expected, indicating that there is room for the pound to perform shortly. In recent months, interest rate expectations have moved forward, and it is now hinting that interest rates will be raised in the first quarter of next year. This should temporarily support the pound and any indication that these expectations may be pushed up further and will be even more bullish.

We will still ease long-term optimism about the pound. The Bank of England’s comments indicates that the neutral interest rate may be close to 1%. Compared with the Federal Reserve, for example, the median interest rate forecast for 2024 is 1.75%. This should be the continued strength of the pound Obstacles.

The UK faces huge and continuous supply-side pressures on natural gas supply, labor supply, and various logistics issues. These increased costs and the burden of UK competitiveness indicate that the long-term fair value of the pound will decline over time.