The pound might be the top-performing major currency for the first half of 2023, but the second half of the year could see this performance draw to a close and the euro recapture lost value.
As we move into H2 analysts are looking for a slide in the value of the pound against both the dollar and the euro, suggesting those businesses with exposure to the pound-euro exchange rate could do well to hedge for a shift in trend.
The pound holds a 2.3% gain on the euro for 2023, but as the first half draws to a close the UK currency is already seen giving some value back, with a half-per cent decline being registered in the final week of the month, quarter and H1.
“The GBP was a notable underperformer relative to the EUR and I expect we’ll see this continue to be the case in coming weeks,” says analyst Brad Bichtel, who heads up FX strategy at investment bank Jefferies, having observed recent forex market action.
According to official data sources, the pound to euro conversion reached a high of 1.1740 on June 19 but has since slid to 1.1550, offering relief to UK exporters and those holding euros looking to buy UK assets.
For importers there might, however, be a sense of regret that the highs have been missed.
Analysts say part of the reasons the pound is struggling at the mid-year point is, ironically, its recent popularity. Investors have increased exposure to the pound but this positioning risks looking bloated, leaving the currency at risk of sharp pullbacks when data or events question the consensus.
But beyond the technical considerations of positioning is the UK economic outlook which is beset by concerns over UK inflationary pressures.
The pound’s recent selloff against the euro accelerated following the release of UK inflation data that turned in a great deal hotter than analysts were expecting.
This drove the cost of borrowing in the UK sharply higher as investors contemplated higher interest rates at the Bank of England which is struggling to convince that it has inflation under control.
Expectations for a peak in the Bank of England’s basic lending rate close to 6.0% have given rise to expectations that the UK economy will inevitably falter under the pressure of high borrowing costs.
It is this fear of a sharp slowdown that is making investors question the pound heading into the second half of the year.
Turning to the euro side of the equation, it is hard to argue in favour of outright strength given the Euro Area economy is already in recession.
Inflation is meanwhile falling, drawing questions as to just how willing the European Central Bank will be to continue raising interest rates.
Another rate rise is expected in July, but whether or not the ECB will follow through with another in September remains a question to debate. Any sense that the ECB is about to close the cycle could deny the euro support.
From this angle, then, although the pound’s run higher might have ended, the downside from here looks relatively contained.
