A steady climb for sterling

GBP

Sterling climbed against both the euro and the dollar yesterday. Against the single currency, it touched its highest levels since just before the pandemic began in February 2020 and has held on to most of its gains this morning.

Sterling is back in favour after currency dealers reacted to the sharp rise in inflation which many now believe will lead to the Bank of England moving the base rate up at its next meeting in December.

EUR

Another torrid day for the euro as it dropped against the dollar and sterling before recovering slightly overnight against the greenback. Yesterday’s Consumer Price Index only showed an increase of 2%, which the European Central Bank’ will argue is proof that there is no threat from inflation and hence no need to tighten policy.

The single currency is also suffering from geopolitical problems on its Eastern borders and ongoing issues with energy supplies, with Germany still holding back on approval for the Nord Stream 2 pipeline. There are no significant data releases in Europe today; however, the ECB’s Chief Economist, Phillip Lane, who has the ability to move the markets, is speaking this afternoon.

USD

US treasury yields are continuing to edge up, and as they do, more demand for dollars is being created, albeit in relatively tranquil trading conditions. The derivative markets are not quite so quiet, with the cost of hedging volatility in EURUSD in the coming month increasing the most in any week since the pandemic began in March 2020. GBPUSD volatility is also on the increase as traders anticipate next month’s central bank meetings, all of which happen within 24 hours of each other on the 15th and 16th December.

After the weekly jobless numbers this afternoon, more members from the US Federal Reserve are on the speaking roster, with Jonathan Williams and Charles Evans scheduled to air their views.