Sterling's volatility against USD
Share
Daily Forex Market Report 16-Dec-2022: Sterling's volatility against USD
Yesterday it was reported by Pantheon that the British pound has been particularly volatile against the US dollar in recent weeks.
That was certainly proved accurate by session’s closed when GBP/USD closed 1.8% lower at 1.219- the biggest daily dip since November 3.
Bearish price action continued in this morning’s Asia trading window, with the pair creeping down to 1.218.
Cable’s bearish reversal followed a 50 bps rate hike from the Bank of England. This was widely expected, but more surprising were the two votes to leave rates unchanged, even though inflation is still in the double digits.
Cable’s volatility streak continues – Source: capital.com
The pound also contended with a surge on the dollar following a pretty hawkish tone emerging from the US Federal Reserve, even though the 50 bps rate hike yielded no surprises.
The US Dollar Index (DXY) added a full percentage point to close at 104.17. DXY is currently sitting at 104.07 in the opening Friday hours.
Sterling also fell sharply against the euro, with EUR/GBP jumping 1.5% to 87.34p. The pair continued to rise in today’s Asia session, and at the time of writing was changing hands at 87.34p.
The pound could be expected to keep falling, given this morning’s pretty rough retail numbers. Sales in the UK decreased 5.9% year on year in November, fairly worse than the 5.6% predicted by the market.
Eurozone inflation figures are due later today, with 10% the going forecast. Anything softer than that could see the euro cool off a bit.
How to manage FX Risk/Exposure?
Understanding your FX risk and exposure is paramount to your bottom line. At Currency Solutions our decicated team of experts can help you manage and understand you exposure or risk.
Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.
As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.
"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.
EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.
Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.
Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.
What does FX Risk/Exposure mean?
There are three types of foreign exchange exposure companies face:
- Economic exposure
- Conversion exposure
- Transaction exposure
In short, FX/forex (foreign Exchange) exposure means the risk that an individual or company takes when executing transactions in foreign currencies.
If a business is looking to make transactions globally or in multiple currencies, it's important that they first identify their exposure to risk in order to put a calculated risk management strategy in place.
FX Risk/Exposure Management - How does it work?
Volatile currency markets can have a huge impact on your profits.
Let say that you set a 2021 price for a product, bought in USD including a 5% profit margin, based on the exchange rate when the pound was strongest.
When the pound weakened, your profit margin would soon erode, and leave you with -2.5% profit - based on the same price, from stock bought at the dollar’s peak.
This fluctuation in price could force you to either absorb the loss or increase your prices, with the knock-on effect of untenable prices in your already competitive market.
We are a payment solutions provider with over 20 years’ experience and expertise in foreign exchange payments Our services inlcude but are not limited to:
- Hedging and FX Strategies
- Best rates for Spot trades
- vIBAN set up
- E-commerce solutions
We know that it can be time-consuming and challenging to keep up with the innumerable ongoing events that continuously affect the global market mood.
Click here for an instant quote or contact us for a free foreign exchange health check, guaranteed to save you money.
