GBP Rebounds As Bond Yields Fall

The Pound Euro (GBP/EUR) exchange rate crawled up from a near one-month low on Wednesday, as hopes for peace in the Middle East saw UK bond yields fall, easing concerns about the strain on the British public finances.

DAILY RECAP:

The Pound (GBP) managed to inch up from its recent weak levels on Wednesday, as hopes for an end to the war in Iran triggered a sharp drop in UK bond yields.

On Tuesday, US President Donald Trump said that he expects the US to pull out of Iran within ‘two weeks, maybe three’. He also indicated that ending the war was no longer dependent on Iran reopening the Strait of Hormuz, with markets hopeful that Tehran would choose to reopen the vital waterway once US strikes cease.

The news led to a sharp fall in UK bond yields, easing concerns about how higher government borrowing costs could prompt the UK Treasury to consider more tax hikes and spending cuts in the future.

Meanwhile, the Euro (EUR) ceded ground to the Pound despite the Eurozone’s final manufacturing PMI being revised higher, from 51.4 to 51.6.

Additionally, EUR also struggled to draw support from its strong negative correlation with the US Dollar (USD), despite the American currency weakening.

The Euro seemingly suffered some profit-taking following Tuesday’s impressive performance against the Pound, with EUR declining as investors sought to bank their profits.

GBP/EUR Exchange Rate Forecast: Middle East Uncertainty to Drive Movement?

Looking forward, UK and Eurozone economic data are both thin on the ground on Thursday, likely leading to muted movement in the Pound to Euro exchange rate.

One factor that could influence the pairing is the conflict in the Middle East, with any new developments potentially driving volatility.

If markets remain upbeat about a possible end to the crisis in the coming weeks, ongoing weakness in the US Dollar could lend the Euro support, due to EUR’s strong negative correlation with USD.

However, if peace hopes fade and the US Dollar gains traction, the common currency could face pressure.

Many commentators remain sceptical about Trump announcing an end to the war. Some believe it could be a tactic to mask a further escalation, as the US is sending thousands more troops to the Middle East. Others fear that the situation could deteriorate over the coming two to three weeks, which may force the US to rethink its plans.

With uncertainty remaining, we could see further turbulence in the currency market over the days ahead.