The British Pound has now eased back against its key rivals, the Euro and the US dollars, despite the tumultuous session for the stock market that has seen the gains in 2021 that was erased in just hours. This is, unfortunately, creating a ripple effect on the financial marketplace.
Pound Sterling had suffered a setback following a deep slump in global stock markets. However, the amazing vaccination story in the United Kingdom, which has rolled out since December 2020, can underpin the currency in the next few days. It can make sure that the damage is limited, especially when it comes to Pounds vs. Euro.
Sterling is faced with contradictory forces. However, the fast vaccine rollout in the United Kingdom is giving a positive light for the UK pound. Still, on the other, the falling global markets are giving it a negative narrative.
Developments like these are a reminder that currency movements result from various factors, thus making it almost impossible to focus on just one narrative.
Influence of Broader Markets
In 2021, there is a general rule of thumb—that Pound Sterling tends to outperform Franc, Yen, US Dollar and Euro when the markets are rising. This, however, is the opposite once the markets start falling.
A sell-off in the global market that happened on January 27 during a trading session capped a rally in the UK pound that had seen Euro buyers earlier get the best exchange rate since May 13, 2020.
Gains were then reversed through the US trading session as investor risk off sentiment leads to sharp losses in commodity markets and equity markets.
This allows the US dollar to make a comeback.
On January 28, the Pound-to-Euro exchange rate is at 1.1305 while the Pound-to-Dollar exchange rate at 1.3675. How the UK pound trades over the next few days and hours could depend on the broader market’s consistency.
Analysts say that it is clear that a rally in stocks is being unwound with no obvious event to pin onto the stock market slump, and a squeeze is slowly underway.
With investors invested in upside bets, any moves lower can make more and more investors exit these types of bets— which is the case currently.
Reuters reported, “dealers highly leveraged investors were taking profits where they could to cover losses elsewhere, leading to sharp falls in a lot of overcrowded trades.”
Also, retail traders’ intense speculative market participation has fueled massive bubbles in some sectors of the global market.
The main example is the GameStop share price increase, as people saw the stock rocketed and it has delivered a massive blow to investors and hedge funds that were betting against GameStop’s stock.
Ortencac Aliaj at the FT stated how the developments impact the hedge funds shorting the market can have more impact: “Funds have not only been covering their short positions – the bets they placed against individual shares – but also selling shares in companies to cut their leverage and reduce their gross exposure to the market.”