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21 Feb 2022

The Laggard: Pound Sterling Struggling against Euro, Dollar and all G10 Rivals

The British Pound looks vulnerable to further losses against the Dollar, an unsurprising finding given recent trends, but also against the Euro which is now looking less vulnerable to the war in Ukraine.
The Pound has fallen against most major currencies over the past week, with a 1.60% decline being registered against the Euro and a 0.86% fall coming against the Dollar.
In fact, when screened over a one-month horizon the Pound is at risk of being the worst performing major currency, contending for the 'wooden spoon' with Sweden's Krona.
In short, the Pound finds itself in an unsupportive global environment characterised by war in Ukraine, rising inflation and expectations for falling global growth.
The prospect of a Bank of England interest rate rise next week is of scant support to Sterling bulls.
Therefore, for now at least, the path of least resistance for Pound exchange rates in the near-term looks to be lower.
Given the war in Ukraine is unlikely to end soon and external inflationary pressures continue to mount, the Pound's trend of weakness associated with the war is likely to persist.
Interestingly, the Euro was at one stage one of the more prominent losers of the war with GBP/EUR surging to post-Brexit highs above 1.21 as recently as Monday, but this is no longer the case.
Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, says the Euro might have fully priced in the negative effects of the war.
"The FX market is getting used to the war," says Leuchtmann in a currency briefing note out on March 11. "I do not mean that in a cynical way. It means that at lows close to 1.08 the market seems to have fully priced in the new situation, that the process of looking for a new market balance had been completed at these levels".
The Pound traditionally tends to underperform in times of global market anxiety: indeed, the Pound to Euro exchange rate's lowest points came not in the wake of the Brexit referendum in 2016 but rather following the financial crash of 2008 and the outbreak of Coronavirus fears in early 2020.
Therefore should the global equity market be in for a protracted drawdown it is hard to see the Pound perform strongly.


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