GBP: Non-negligible risk premium – ING

FXStreet Insights Team FXStreet

Recent UK data releases have not endorsed the market’s tentative speculation on faster Bank of England easing, and two-year GBP swap rates are around 8bp above last week’s lows. Expectations are firmly back on a cut in August and one in December – which is also our call, ING's FX analyst Francesco Pesole notes.

No meaningful impact on the pound this morning

"With the rewidening of the EUR:GBP short-term rate differential in favour of the pound over the past couple of weeks, EUR/GBP’s resilience suggests markets are attaching some risk premium to the pair, which we currently estimate to be 0.8% overvaluation. That may appear contained, but it's already close to the upper bound of the 1.5 standard deviation band that would signal stretched misvaluation."

"That GBP risk premium is partly because of the euro’s idiosyncratic strength (due to its appeal as a reserve currency) but may also embed some UK budget concerns. Those were fuelled further this morning as the UK unveiled larger borrowing for June (£20.7bn) than expected by the UK fiscal watchdog. There is no meaningful impact on the pound this morning, but that probably raises the chances even further of tax hikes this autumn, a prospect that can keep GBP upside capped."

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD defends 0.7000 ahead of RBA on Tuesday

AUD/USD is defending 0.7000 at the start of a new week, trading near its lowest level since August 4 amid a bullish US Dollar. US yields hold near multi-year highs amid inflation risks from higher oil prices and rising bets on an October Fed rate hike. This, along with the US-Iran standoff, continues to underpin the safe-haven buck and weigh on the pair ahead of Tuesday's RBA policy announcements.

USD/JPY climbs back toward 158.00 after BoJ minutes amid firm USD

USD/JPY finds dip-buyers and reverses part of Friday's slide driven by speculation that authorities will step in again to prop up the Japanese Yen. However, the BoJ's dovish Minutes cap the JPY. Meanwhile, the US Dollar regains traction as the US-Iran standoff supports crude oil prices, fueling inflation fears and reaffirming bets for an October Fed rate hike. This further supports the pair, driving it back toward 158.00.

Gold sheds 3%, eyeing $4,100 on renewed US-Iran risks

Gold is falling hard at the start of a new week, targeting $4,100 for the first time in eight weeks. Firming October Fed rate-hike bets, along with oil-driven inflation risks, keep US bond yields elevated near multi-year highs, helping the US Dollar hold firm, particularly after Trump rejected Iran's truce offer. These factors weigh heavily on the bullion.

Zcash risks a decline below $1,500 as bullish momentum eases

Zcash price hovers below $1,550 on Monday, extending losses after a 4% decline the previous day. Institutional interest in the privacy coin holds firm, recording over $35 million in inflows last week, while retail speculation takes a hit, with ZEC futures Open Interest down around 10% in 24 hours.

Data back in the driver’s seat this week

Markets will look for fresh evidence of a hot US economy from this week as September figures start to flow in. Upside surprises in jobs data could take rate hike pricing for the October FOMC above 20bp. It’s not our baseline though, and we expect some stabilisation with modest downside risks for USD in the coming days. We expect a hawkish hike by the RBA tomorrow.

Fed vs BoJ: Both hiked. The market only believes one of them – and the chart shows which

The Fed and the BoJ have just done something remarkably similar. Both central banks raised interest rates by 25 bps last week, both are confronting inflation risks, and both signal that future decisions will depend on incoming economic data.