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ACM Update Monday 11th October 2021

With sterling frankly taking a battering the week before, there was a slight mood of recovery for UK markets last week to steady the ship a little. Is this just a “transitory” recovery for the pound though? Over in the US, non-farm payroll figures disappointed for the second month in a row as the US jobs market begins to slow its pace of recovery.

The pound was on a much more buoyant run of form last week but not exactly for all the right reasons. With inflation on the rise, plus the gas and fuel crises dominating headlines, the Bank of England may well have their hand forced soon with regards to interest rate rises. Despite concerns about economic growth and retail sales, Bailey and Co may soon have to take action.

Despite the potential interest rate rise being somewhat forced, UK investors made the most of the support it gave to the pound, pushing sterling to its highest level against the Euro since early August. The end of the furlough scheme does not seem to have brought the surge in unemployment numbers that many were fearing…..yet. Numbers of proposed redundancies for employers in September were actually close to record lows going back fifteen years. The chart against the Euro last week is shown below:

GBP-EUR pushed up to just under 1.18 last week.

We are currently at excellent levels for clients buying Euros, with an improvement of over 2.5% in the last ten days. Reach out to the team if you have upcoming requirements in this direction.

Meanwhile up in Manchester, Boris Johnson spent his week at the Conservative Party conference, declaring he will “get on with the job of uniting and levelling up the UK”. In an upbeat speech containing more jokes than major policy or substance, the PM continually referred to his opposite number Keir Starmer as “Captain Hindsight”.

In terms of more fundamental economic events, the Reserve Bank of Australia (RBA) had their latest policy meeting last week. Having stated for months now that conditions will not be right for an interest rate rise for a number of years to come (likely 2024), the holding of interest rates came as no surprise.

The RBA also continued their strategy of winding down bond purchases to AU$ 4 billion per week, which will remain the approach until February 2022. Governor Philip Lowe expects jobs and the overall economy to recover quickly once the current lockdowns end.

Meanwhile on the other side of the Tasman Sea, the much-awaited interest rate rise from the Reserve Bank of New Zealand finally materialised, with their own base rate moving up from 0.25% to 0.5%. Monetary stimulus has continued to be reduced also, and as with Australia the expectation is for the economy to recover quickly once current restrictions ease. Expectations are for inflation to rise to 4% temporarily, before returning back down to closer to 2% (this sounds very familiar).

The Non-Farm Payrolls in the US were the main event of the month, with the September figures released on Friday. The previous month was well short of expectation and this was no different with 194,000 jobs added to the economy versus a forecast of almost 500,000. All this indicates that the US is still more than exposed to the continued spread of the delta variant across the globe, and could well cause further delays to the taper talk from the Federal reserve. The figure saw the USD weaken  temporarily, as displayed in last week’s chart below:

GBP-USD nudged up on Friday afternoon after the Non-Farm figure.

Onto this week now and a couple of important bank holidays to be aware of in North America on Monday. American markets are closed for Columbus Day whilst Canadians celebrate Thanksgiving Day. Trading volumes will be lower as a result, so any unexpected market events or data releases could well have more of an impact than usual.

Unemployment data for the UK is the first major release on Tuesday morning. It is important to note that these figures are for August and thus unemployment is actually expected to show a fall in this data, down to 4.5% from 4.6% the month before. Claimant count numbers are also expected to continue falling at pace.

The German ZEW Economic Sentiment figure released shortly after will make for an interesting read this month. The figure is a survey of German institutional investors and analysts, declaring their optimism or pessimism for the country’s economy. It is often an excellent leading indicator, and in light of the recent election fallout and ongoing coalition talks, the figure is forecast to fall back on recent months. The Eurozone’s powerhouse has certainly had a tough few weeks.

Wednesday is a busy one with manufacturing, industrial production and GDP figures for the UK, again for the month to the end of August. GDP will be the one to watch after last month’s “growth” of 0.1% for the UK economy. As mentioned in a recent market update, low growth, high inflation and high unemployment are the three prongs of the dreaded “stagflation”. We get data on two of those this week so could be in for a bumpy ride for sterling.

Meanwhile the US has its own range of inflation figures released this week, with consumer price index (CPI) and producer price index (PPI) sandwiched either side of the minutes from the latest Federal Reserve Meeting. Exactly how close the Fed are to a taper remains to be seen, but Friday’s Non-Farm data will not have helped the dilemma.

US retail sales close out the week, whilst Australian unemployment numbers are expected to take a bit of a hit in light of the recent lockdowns and restrictions down under.

So plenty happening at home and abroad. I think I can be confident that a pound in the jar every time stagflation is mentioned on Bloomberg this week should comfortably pay for my lunch each day, based on the data releases coming up. Fingers crossed we do see some growth for the economy in August though, as otherwise the Bank of England will have even more of a conundrum on their hands.

Fortunately, we do have ways we can help you with your FX exposures. We could be in for a pretty bumpy Q4 as recent sterling data releases filter through, so make sure to get in touch so we can help protect your exposure.

Stay safe and enjoy the week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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