UPDATE 1 pound hits January lows after Tuesday faded, anchored by UK fuel shortages
* Chart: World exchange rates in 2020 http://tmsnrt.rs/2egbfVh
* Chart: Trade-weighted pound sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv (adds context and commentary on fuel shortages)
By Ritvik Carvalho
LONDON, Sept.29 (Reuters) – The British pound hit its lowest level since January against the dollar on Wednesday as concerns over soaring natural gas prices and nearly a week of oil shortage outweighed the recovery of global stock markets.
The Pound generally trades in accordance with global risk sentiment and, as such, is sensitive to the performance of global stock markets. Tuesday’s massive sell-off of global equities came as investors braced for future rate hikes from global central banks, including the U.S. Federal Reserve.
Although stocks staged a rally on Wednesday, the British pound extended its losses on Tuesday and fell 0.2% more to its lowest level since Jan. 11 against the dollar at $ 1.35045.
It traded roughly flat against the euro, near a two-month low at 86.40 pence to the euro.
“Sterling bears are in charge of FX price action at the moment,” said Valentin Marinov, G10 FX research manager at Credit Agricole.
“Investors are worried about the looming stagflation risks that could derail Britain’s economic recovery and force the (Bank of England’s Monetary Policy Committee) to reconsider its plans to normalize policy. In turn, a less proactive BoE could lead to even more negative UK rates and gilt yields. “
Bank of England Governor Andrew Bailey is expected to speak at a forum in Sintra, Portugal on Wednesday.
UK 10-year gilts also hit their highest level since the start of the pandemic above 1% on Tuesday.
“Gilts have underperformed US Treasuries and Bunds this month. It’s a harbinger that markets are more worried about the growth and inflation outlook for the UK,” said Kenneth Broux, strategist at Societe Generale.
“We have had Bailey twice in the past 4 days, warning that the BoE may hike rates before QE ends, warning the markets that they are seriously considering it. We will see more inflation numbers. unpleasant and this will give rise to interesting discussions at the MPC (Monetary Policy Committee) in November and December.
A key indicator of the financial market’s expectations for inflation in Britain over the next several years, closely watched by the Bank of England, hit its highest level in at least eight years on Tuesday, as yields gilts leapt.
The five-year and five-year inflation-indexed swap – an indicator of inflation expectations over the next five years – rose to 3.905%, the highest since the start of daily records released by Refinitiv in 2013, and against 3.878% Monday.
The move reflects investors’ growing belief that rising inflation in Britain will not be as transient as the BoE is hoping, with recent supply chain issues turning into a widespread crisis during the week. last.
A post-Brexit truck driver shortage as the COVID-19 pandemic eases has wreaked havoc on UK supply chains in everything from food to fuel, raising the specter of disruptions and spikes in price as Christmas approaches.
Drivers have panicked for fuel for nearly a week, leaving pumps running dry in major cities, after oil companies warned they did not have enough truck drivers to carry gasoline and fuel. diesel from refineries to gas stations.
“While we admit that rising domestic fuel prices are a hindrance for the UK consumer, we do not believe recent developments are existential enough to weigh on the pound sterling as they have been,” said Kamal Sharma , FX strategist at BoFA Global Research.
“Indeed, during the New York and Asia session, we observe that the pound sterling was relatively stable – we would have expected continued selling pressure if the narrative was one of a fundamental deterioration in UK economy. More likely, we think the British pound succumbed to rebalancing pressures at the end of the month / quarter, as it did in the first and second quarters. “
Nomura’s Jordan Rochester and George Buckley said the extreme sterling price action was not much of a surprise.
“Gas prices are moving in an extreme way, so why not also on FX? The concern of macro investors is whether the pound sterling becomes a market that will become really unpredictable,” they wrote in a note to clients.
“Perhaps the UK suffers from permanent shock risks, as it used to in the politically GBP-driven Brexit era (2016-2019), at a time when many macro investors were looking more thematic trading elsewhere. This is something we don’t do. I don’t expect this to happen for a considerable amount of time, but a risk we cannot ignore on days like this. “
(Reporting by Ritvik Carvalho; editing by Philippa Fletcher)