The pound sterling was the pick of the G10 currencies on Monday (9 July) morning, the worst of the bunch in the afternoon and so far this week, is middle of the pack, So what next?
In a note to clients, Kit Juckes, Head of forex at Société Générale, opined: "Relative real yields suggest the pound ‘should' be making a bit of headway against the dollar. EUR/GBP has decoupled from relative yields, which is where you can see the political risk premium in the currency's value. Can that premium really grow a lot from here, given that the currency is priced for modest growth, a single rate hike and long-term, political uncertainty? We favour buying sterling into politically-inspired weakness, buying GBP/USD dips as long as EUR/USD 1.15 holds."
It's worth re-emphasising that the main driver of GBP/USD remains EUR/USD. Juckes added. "The EUR/GBP correlation with yields has been unstable, and is now awful. Likewise the correlation between GBP/USD and real yields. There just isn't a correlation between EUR/USD and EUR/GBP, but the correlation between EUR/USD and GBP/USD is high, and stable most of the time."
Elsewhere, treasury yields edged higher with equity prices on Monday. "The yield curve remains very flat but at 30bp, 2s 10s are some way from inverting and the press have run out of scary headlines on this topic for now. Instead, in a rather old-fashioned way, the combination of higher yields and higher equity indices is helping the dollar in G10 and hurting the yen."
Juckes also doesn't think EUR/USD is likely to break out of its current 1.156-1.1850 range unless/until yield differentials move more in tis favour or the BTOP/Bund spread gets a lot narrower (i.e, political concerns melt away). "On a 6-12 month view, we're confident that will happen, on a 1-3-month view, we are much less confident and will watch the range. Overnight, yield differentials have moved a bit against the euro and soft French manufacturing data don't help, at the margin."
