Saturday, December 03, 2022

Amundi says turmoil in UK market points to increased currency volatility

El Asesor Financiero

By Sergio Bertoncini, Senior Fixed Income Research Strategist – Amundi Institute; Federico Cesarini, Director of Forex for Developed Markets and Analyst at Cross Asset Research – Amundi Institute; Laurent Crosnier, Global Head of Forex; and Annalisa Usordi, Cross Asset Analyst, and Senior Macro Strategist – Amundi Institute

We continue to see a slight slowdown for the UK; In fact, we believe that the economy is already in recession. Although the fiscal package will stimulate demand in a supply-constrained economy, it will likely put a damper on growth, while supporting inflationary pressures from demand, leading to higher inflation in the medium term.

The Bank of England (BoE) may be forced to act more boldly: The massive sale of gilts (Treasury bonds) is in line with the BoE’s re-evaluation of the expected trajectory and with the fact that the fiscal package represents a game changer on offer Because it comes at a time when BoE is about to start QT, increasing the pressure on Gilt technicals.

market reaction Market reaction to the announcement of new unfunded tax cuts has been intense, indicating that Britain’s political stance is coming under scrutiny. New tax measure likely Contributes too little to growth and too much to inflation, leaving the real return unattractive to most foreign players. The problem is that the current configuration of real and Stirling yields Unable This time to attract the appetite of investors.

Look at the Pound Sterling: In a few dramatic trading sessions, the British Pound fell below our short-term target of 1.10. We believe the risks are downside biased: Given that it has already been priced, in our opinion, that a less aggressive signal from the Bank of England would trigger a move below parity. Therefore, despite this strong move, we believe investors should refrain from shorting the move and Resist the Urge to Jump in the Pound Sterling As we still don’t see the light at the end of the tunnel regarding currency collapse.

Vision on the Forex Market: The process of normalizing world monetary policy is being implemented by central banks on different terms and at different speeds, which means an increase in instability When it comes to currencies. Other factors also come into play, such as the current geopolitical situation, a slowdown in world trade and a possible readjustment of foreign exchange reserves.

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