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Foreign Exchange

Don’t expect an Olympics bounce for cable

Summer has arrived, the Olympics open on Friday, and millions of tourists are pouring into London. Surely a time to lift the mood, perhaps look for a short-term lift in sterling as the UK basks in the attention of the world? Don’t get caught up in the emotion, it’s unlikely to happen, say FX strategists at Barclays.

First, Barclays studied the empirical evidence of previous sporting events, and found that there was a wide range of outcomes, and therefore nothing statistically significant to suggest that an Olympics event, either summer or winter or a football World Cup, provided uplift for the hosting countries’ currencies.

 Host currency performance relative to the USD around major sporting events

 
 Source: Bloomberg, Barclays Research


Barclays excluded Olympics and world cups held in eurozone countries and the US, because of the limited impact it would have on those currency blocks. Sara Yates, the author of the report, has therefore identified four channels through which the host country might be affected by a large sporting event, and the evidence for a rise in sterling was not compelling.

As tourists pour into London, there’s likely to be a pick-up in demand for the host currency, but in relation to daily volumes traded, it’s a tiny proportion, the report says.

In terms of the improvement in economic conditions, which might lead to a change in economic conditions, again the evidence suggests that it would be unlikely to be sustained and in the context of today’s second-quarter GDP figures (output fell 0.7% compared with an expected 0.2% fall), the Monetary Policy Committee is likely to look through any uptick in activity.

Although there may some uptick in sentiment in the third quarter, the report says there has been little evidence of an increase in sentiment towards a host country following a big sporting event. The fourth and last filter Barclays used in its analysis was the potential improvement in the UK’s terms of trade. Again, the analysts found no evidence of a country’s terms of trade being boosted by the Olympics.

Nonetheless, today’s dismal GDP numbers might not be sufficient reason to sell sterling, Barclays adds. Rather, they expect EURGBP to depreciate on the back of the European Central Bank’s more aggressive loosening bias than the MPC, in addition to the concerns about the speed of progress on the euro area debt crisis.

Moreover, these same concerns about the eurozone are also driving much of the currency diversification from reserve managers, which is also helping underpin sterling. That might limit any significant downside, traders say.

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