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ACM Update Monday 13th September 2021

The so called “Pingdemic” caused a slowdown in economic growth in the UK for July, whilst in Europe the ECB slowed the pace of their pandemic bond purchases. In the US, growth also slowed, largely attributed to concerns about the Delta variant hampering demand. After a week of the major central banks of the world updating on their own economic pictures, what does the week ahead hold?

A slow start to the week for European markets last Monday with Labor Day in the US and Canada reducing trading volumes. Even elsewhere data releases were thin on the ground. With the substantial miss on the US Non-Farm data ten days ago, expectations of tapering (and the interest rate rises to go with the taper) have been pushed well back. GBP has now made gains against the Dollar for three weeks in a row, following losses for the three weeks prior. Are the tables turning? Moves over the last week can be seen in the chart below:

GBP made gains of circa 1% in the second half of the week.

Meanwhile on the other side of the world, Australian markets have continued to suffer from the widespread lockdowns in major cities across the country. Vaccination rates are improving though, with some light at the end of the tunnel for Sydney at least once 70% of its adult population are fully vaccinated.

The economic effect of these lockdowns hasn’t gone unnoticed by the Reserve Bank of Australia. Last week, the RBA reduced asset purchases as of this month (as suggested in August), but deferred the next review of its quantitative easing programme from November, out to February 2022. The move helped GBP recover some of the ground it has lost against the Aussie in recent weeks.

So, the delta variant continues to cause disruption in Australia and New Zealand, which is likely to make other major central banks nervous around tapering their own bond-buying activities any time soon.

Apart from in Canada however, where the central bank believe they are reaching a stage where it may not need to be adding economic stimulus for much longer. However, they also made it clear that “we are not there yet”. Despite a shock fall in GDP in the second quarter, expectations are for more positive figures for the rest of the year, followed by likely interest rate hikes into 2022. All this with an election to come a week today. A very busy picture.

Continuing the central bank theme, the Federal Reserve’s “Beige Book” was released on Wednesday evening. This analysis is published two weeks before the next Fed meeting and provides information on market conditions which the Fed use to make their policy decisions. Normally an important piece of data, after the recent Jackson Hole speech by Jerome Powell and the subsequent Non-Farm flop in August’s figures, we were always unlikely to see too much by the way of movement this time. Dining, travel and tourism seem to be the latest areas to suffer a slowdown as a result of the delta variant spread in the US.

“The lady isn’t tapering” was the tongue-in-cheek remark from Christine Lagarde last week who announced the ECB are moving to a “moderately lower pace” with its Pandemic Emergency Purchase Programme (PEPP). Sounds like a taper but is more of a recalibration (apparently). GDP for the Eurozone was also revised up to 2.2% for Q2 last week. GBP-EUR moved to its highest levels in circa 3 weeks, as shown in the chart below:

A flatter picture on GBP-EUR, which is still very much rangebound.

Bank of England Governor Andrew Bailey acknowledged last week that he thought the pace of the UK’s economic rebound was plateauing. It was as if he had already seen the figures to be released on Friday, and in his position, he probably had! GDP had only grown by 0.1% from June to July, according to the latest release from the Office for National Statistics. This was the slowest rate of growth in six months and was widely attributed to the “Pingdemic” in the UK, with workers having to self-isolate after close contact detected by the NHS COVID-19 app. Rules have since changed for double-vaccinated adults.

Outside of the economic goings on, Boris Johnson’s tax hike to fund social care was also in the spotlight, causing some GBP weakness earlier in the week. Criticism was fairly widespread, including from within his own party at the recent move.

For this week, Tuesday morning provides us with the latest glimpse into unemployment data from the UK. Favourable moves are expected on both claimant count numbers and overall unemployment as various sectors of the economy return to full capacity, especially the hospitality sector over the summer holidays.

Wednesday morning will see the latest inflation figures for the UK. Last month the figure fell surprisingly to 2.0%, but being year on year data, this was accredited to a bigger change in July last year as restrictions eased then, thus the comparison was slightly skewed. For this month, expectations are for 2.9%, well above the Government’s 2% target. Entertaining fact: Any figure of 1% above or below the 2% target means the Governor of the Bank of England has to write a letter to the Chancellor explaining why. Rishi Sunak then writes back to Andrew Bailey in acknowledgement. The most recent occasion was back in April of this year.

In a fairly quiet week, Thursday will bring Retail Sales data from the US which will be a big clue as to whether spending on the high street is still improving or whether consumers are still concerned about the spread of the Delta variant. Friday morning provides the equivalent figure for the UK, followed by inflation statistics for the Eurozone. I have a feeling “transitory” could make a few appearances in next week’s market update…….. Watch this space.

For now, we still find ourselves very much rangebound on GBP-Euro and GBP-USD. If you have upcoming requirements on these (or indeed any other currency pairs), please reach out to the team for more detailed information and strategy on your specific conversions.

For those focussed on GBP-EUR, a move below 1.1550 over the coming days would suggest lower levels to come, and a substantial break above 1.17 would indicate cause for positivity. At the moment, despite UK data being mixed, the latter looks the more likely. On Sterling-Dollar, the support levels remain around 1.36 having bounced off this level twice in recent months, whereas moves last week close to 1.39 again would imply a more positive picture for the pound.

As always, we wait and see.

Have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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