This is evident in both the charts and our client trading volumes, with interest in the cross picking up as it has moved further below the 0.80 level. This level proved to be a key area of resistance back in 2008, with the cross moving higher on the escalation of the financial towards the end of that year and although the cross moved below 0.80 in May of this year, the moves proved to be fleeting.
This time around, the downside momentum has been stronger. Of course, it’s not all been about sterling, with the euro having a fairly difficult month so far. Since 5th July, when EUR/GBP first broke back below 0.80, the euro has lost more than 2% vs. the USD, whilst only the yen and the Canadian dollar have outperformed sterling in terms of the major currencies. We’ve seen interest rate differentials move modestly in favour of sterling during this time, eurozone 2yr rates moving down faster than their sterling equivalent. As we’ve discussed before (The Proud Pound), the UK currency benefitted from diversification flows during the first half of the year as investors looked to bypass the euro area.
From a domestic perspective however, sterling’s strength vs. its main trading partner naturally creates fresh challenges and undermines the long-term desire of the Bank of England to see a rebalancing of the UK economy towards greater reliance on net exports and also investment. So, whilst some may see the Bank’s latest extension of its quantitative easing program as a means of lowering sterling and helping to achieve this aim (although naturally the Bank is not going to state it this way), any such desires are likely meet with disappointment, with this latest down-move on EUR/GBP looking likely to be sustained in the second half of the year.