FX round-up: Pound yields YTD gains versus dollar as consensus trades punished
Sterling was little changed towards the end of the session on Tuesday, amid calm trading across currency markets, with market participants apparently completely focused on events in stockmarkets.
Yet according to many analysts that calm was in itself quite significant, denoting scant 'contagion' from rocketing levels of equity market volatility and hence - possibly - pointing to an eventually less risky trading environment.
However, a certain amount of volatility was visible early during the session, as traders waited for the opening bell on Wall Street against a backdrop of large swings in the Chicago Board of Options Exchange's volatility index and a near 600-point drop in futures on the Dow Industrials at one point during the day.
Thus, by 2000 GMT cable was off by just 0.05% to 1.3959, but only after having hit an intraday low of 1.3836.
In parallel, euro/dollar had clambered back from earlier losses that saw it trade down to 1.2313 and was changing hands at 1.2392.
The price action in dollar/yen was roughly similar, with the Japanese currency unit oscillating between lows and highs of 108.45 and 109.67 versus the greenback, respectively.
Euro/gbp meanwhile was up by 0.1% to 0.8880.
To take note of perhaps, much like US stocks, recent selling had seen the pound surrender almost all of its year-to-date gains versus the US dollar.
According to analysts at Nomura, that was no coincidence.
"Even though the moves in forex have been more conservative than equities, it has some cross-market spillover and it's where there lies consensus positions that hurt the most," the Japanese broker told clients.
On a related note, looking out to Super Thursday, analysts at Bank of America-Merrill Lynch told clients to expect the Monetary Policy Committee to validate then current market pricing for a path for Bank Rate of three hikes over three years.
"The primary reason for not going all in on the next hike yet is inflation. Sterling's gains will, in our view, cut the BoE's two-year inflation forecasts to 2% while growth forecasts will likely be raised. The better growth outlook will justify higher Bank Rate expectations; lower inflation should keep them from pulling the trigger imminently. We think the main risk is the BoE raises growth more than we expect and gives a more hawkish message.
"[...] In our recent GBP note we argued investors are placing less premium on Brexit negotiations. Evidence from the options market suggests GBP is no longer the idiosyncratic story it once was as the "transition put" underpins sentiment."