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ACM Update Monday 15th February 2021

Sterling continued its great run last week, pushing to further highs against the Dollar. That now puts the Pound up by almost 10% in the last five months versus the greenback, begging the question of how much further it can go. Meanwhile in Europe Mario Draghi is back, this time as Prime Minister of Italy and in the UK it is 50 years today since Decimal Day.

Can Mario Draghi help support the Euro yet again?

Of all the things I thought I would be writing about in 2021, admittedly Mario Draghi returning to the spotlight as the Prime Minister of Italy was not one of them. The Italian spent a very popular and successful spell as President of the European Central Bank until his term finished towards the end of 2019. The question is, can “Super Mario” help support the Euro in the same way he did previously at the ECB?

The economist now faces the challenge of reuniting the broad political spectrum of Italian politics, having secured support from the largest parliamentary group, the Five Star Movement. His first step will be to take on the challenge which ultimately claimed his predecessor, Giuseppe Conte, in deciding how to spend the €200bn plus of EU recovery funds to rebuild Italy from the pandemic. After being the initial European epicentre almost a year ago, the country still has the sixth-highest death toll in the world. The Italian was renowned as the “Saviour of the Euro” whilst at the ECB, so hopefully he can save Italy now also.

Elsewhere in Europe we saw a raft of German economic data released last week which generally was a mixed bag. With strict restrictions still in place, industrial production data recorded growth of 0.0% for December, worse than the 0.1% the markets were hoping for. This figure being a leading indicator of the health of the economy does not bode well for next month’s figures, given that restrictions have been tighter since then. The powerhouse of the Eurozone struggling so much, really demonstrates the plight of the Euro of late, as shown in the below chart.

GBP-EUR continued to trend strongly.

The UK continues to vaccinate at pace, with the major milestone of 15m vaccinations having been administered, reached over the weekend. The rate of progress continues to boost GBP and once again took the pound to fresh highs against the Euro and USD towards the end of the week. We closed very close to those highs on Friday evening, with GBP having spent most of the week trying to break through the mid 1.38’s versus the Dollar. As shown in the chart below, we have now broken through those levels. What does the rest of the week hold?

Sterling-Dollar has pushed to fresh highs (again) this morning.

Thursday had seen a slight slump for sterling against both the Euro and Dollar, but the raft of data releases for the UK on Friday morning were largely favourable. Again, it should be pointed out that the data was for the month of December, so the great British love of spending at Christmas can only help for so long! The NIESR (National Institute of Economic and Social Research) estimate for the GDP release for January estimates a drop of 2.5% though, so not everything is rosy for the pound.

Before we talk about market events in the week ahead, today sees the 50th anniversary of decimalisation in the UK. At midnight on 15th February 1971, the UK went from a system dating all the way back to Roman times, to falling in line with a lot of other European and Commonwealth countries, as the Pound was divided into 100 “new pence”. The process of getting the new coins into circulation took three years and was overseen by the DCB, the Decimal Currency Board, with banks closed for four days from the previous Thursday to prepare.

Firstly, there are a few significant bank holidays this week, starting on Monday with President’s Day in the US, celebrated on the 3rd Monday of February in honour or George Washington’s birthday (22nd Feb). Chinese markets remain closed from Monday to Wednesday for New Year. These two events combined will lead to lower volumes in the FX markets, so less significant data releases could well have more of an impact than usual. Could we see sterling benefit even further in the quieter market conditions on Monday. Watch this space.

Tuesday sees the release of the monetary policy meeting minutes released for the Reserve Bank of Australia, so keep an eye out for AUD movement there. The RBA mentioned recently they don’t expect to touch their interest rates until at least 2024, so clues with regards to stimulus and ongoing forecasts for the Australian economy will be the more likely information to move markets. This week also sees Australia unemployment figures on Thursday.

Another major focus for the German economy, the ZEW economic sentiment, is also released on Tuesday.

Wednesday sees CPI data first thing for the UK economy, followed by HPI Index for house prices. Strong figures here and we could see GBP really taking a further boost. How much further can we go though, that remains to be seen. I have to re-iterate my points from last week that these are excellent levels to be buying Euros and Dollars at the moment. Gaining 5.5% as a Euro buyer in the space of two months, or 10% as a Dollar buyer in the last five months must be considered a great buying opportunity. In this age of virtually 0% interest rates globally, these gains are huge in such short periods.

Retail sales data for the US and UK land on Wednesday and Friday morning respectively, with the ECB meeting minutes on Thursday lunchtime sandwiched in between. These are all fairly sizeable releases, especially with the number of bank holidays during the week.

The final day of the week sees a raft of PMI data out from the UK and Europe first thing in the morning. These will be closely scrutinised as they will give a clue on what to expect in terms of growth in the relevant sectors. Quite a big morning on Friday.

All in all, sterling sellers still find themselves in a fantastic position. For sterling buyers the picture is more challenging, but it is a prudent time to reach out and see how we can assist. The team are all working from home, but as hard as ever to help protect our clients against currency movements. Do drop us an email or give us a call and we can take a look through your options.

And finally, enjoy your pancakes on Tuesday! Probably just as well there aren’t figures released a week later on the number of those consumed!

Until next time……..

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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