GBP EUR Starts the Week with 1.1800 Test

The GBP EUR exchange rate was higher by 0.30% on Monday with the pair seeing its highest level two months. The pound sterling has shrugged off recent energy market woes to continue its uptrend. Tuesday will start the economic data for the week with UK employment.

The GBP to EUR trades at 1.1792 after an early test of the 1.1800 level.

Pound sterling powered higher by rate hike bets

Money markets have increased their bets on a November interest rate increase as soon as next month after a relentless rise in yields last week. Hawkish comments from policymakers also raised expectations of Britain’s first post-pandemic interest rate hike.

Interest rate futures traded on the Chicago Mercantile Exchange showed November contracts were pricing in as much as a 20% probability of a rate hike next month compared to 12% last week while December futures were pricing in a 45% probability of a rate hike.

Bank of England policymaker Michael Saunders told markets to get ready for “significantly earlier” interest rate rises as inflation pressure mounts in the British economy, according to the Telegraph newspaper on Saturday.

The British currency had been struggling with energy market issues after a surge in gas prices and fuel shortages, but traders are now refocused on interest rate differentials.

“I’m not in favour of using code words or stating our intentions in advance of the meeting too precisely. The decisions get taken at the proper time,” Saunders said.

“But markets have priced in over the last few months an earlier rise in Bank rate than previously and I think that’s appropriate.”

The bank’s Governor Andrew Bailey also weighed in over the weekend, saying that inflation is likely to head higher, and that the Bank faces a “very delicate and challenging job” with the economy in the longer -term.

Markets on edge with another Evergrande debt failure

Financial markets were nervous on Monday after more bad news about the Chinese property market as struggling giant Evergrande looked set to miss a fresh debt repayments worth $148m, and another developer pleaded for more time to repay what it owes.

China Evergrande Group missed two payment deadlines last month worth $131m amid widespread concern of huge losses as the developer struggles with more than $300bn in liabilities.

Markets are fearing contagion in the Chinese property market with up to 30% of the country’s economy relying on the sector.

In Europe, Russian energy firm Gazprom has increased its 2021 price guidance for natural gas exports, while signaling caution on shipping, as the energy crisis worsens.

The Russian giant is Europe’s largest supplier of the fuel and said that domestic inventories were its top priority. Only after it has refilled its own storage facilities by the end of October, would the company consider increasing exports to continental Europe, according to energy analysts Wood & Co.

The energy crisis is due to scarce supply exhausted by rebounding demand, which risks slowing the region’s economic recovery by hiking business costs, household bills and inflation.

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