The end of last week and the beginning of this week was a real rollercoaster ride in the financial markets. The volatility of developed countries’ currencies during this period, particularly the British pound, could be compared to the time of the Great Financial Crisis, the Brexit referendum or the pandemic that hit financial markets.
Current overview of the financial markets
Today the financial markets appear to be catching their breath after the recent turmoil. The US dollar appears to be depreciating slightly in the broader market, which can also be caused by the phenomenon of profit taking from sudden dollar trends. As of 09:300 GMT+3 today, EUR/USD is up 0.57% to $0.9663. The GBP/USD pair rose 1.3% to $1.0821, while bitcoin bounced back above the $20,000 level and gained nearly 6%. Stock index contracts also rallied. The DAX rose less than 1.5% to 1,377 points and the S&P500 rose 1.48% to 3,704 points. The dollar index, on the other hand, fell 0.65% to 113.57 points. It had previously set a new high in a multi-month trend above 114.60 points.
The financial markets are racing for peak interest rates
The market currently seems to be outdoing itself when it comes to betting at what level and in which country interest rates would peak. The sterling could prevail as the Bank of England could be forced to counter the UK government’s fiscal easing and raise interest rates faster and more than previously expected. Currently, the market expects UK rates to rise by as much as 175 basis points and only until November, while the market sees the peak of the cycle in the 6% region. In the US, meanwhile, interest rate markets are assuming that the Fed’s interest rate range could peak in February 2023. This could be between 4.5 and 4.75%. Therefore, the US bond market could also be close to full discount to rate hikes as 2-year bond yields hit 4.3% yesterday. In the Eurozone, on the other hand, the EUR could be above 3% in six months. Thus lower than the pound and the dollar while higher than the Japanese yen. For the JPY, interest rates are expected to remain unchanged throughout the year according to the market assessment of the interest rate level.
What’s Next for the British Pound?
According to Citigroup, GBP/USD parity looks “quite likely” as there are no clear valuation thresholds for the pound, but “I wouldn’t go as far as to say it’s inevitable,” Ebrahim Rahbari, Global Head of FX Analysis at Citigroup, said on Bloomberg TV. “We see parity as the next big level,” he added. While conventional valuation suggests sterling doesn’t need to weaken much, “it’s really that risk premium that comes with some of the policy action that makes it so likely that we’ll drift, maybe beyond parity.” Currency problems are unlikely to escalate into a crisis, he said, because the UK does not have a lot of foreign currency debt. He added: “The risk of default is much lower.”
Meanwhile, Morgan Stanley has revised its forecast for the pound and now sees it reaching parity with the dollar by the end of the year as neither currency intervention nor emergency rate hikes by the Bank of England will halt the sterling’s weakening. “Recent price action suggests GBP is under pressure,” analysts at Morgan Stanley wrote in a note on Monday. The bank’s previous forecast for GBP/USD was 1.02. It is now 1:00 am. Analysts also revised their forecast for EUR/GBP to 0.9500 by the end of the year from 0.9100 previously.
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