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ACM Update Monday 16th August 2021

Much to the joy of many in England, the football season got back underway over the weekend, taking over the baton from the much-delayed Olympics. At Lords, the Test cricket summer is also in full swing. In the FX league table, GBP rose to its best position in 18 months versus the Euro, but the strong jobs report from ten days ago for the Dollar kept it top of the pile across the majors. Can the Euro keep out of the relegation zone for the rest of the year?

For the first time in six months, we saw GBP-Euro break out of its narrow trading range last week and did so in style. Not since those distant pre-pandemic times of February 2020 have we seen the pound at such levels, and hasn’t the world changed since then. Back then, sterling lost 12% in the following few weeks as the pandemic took hold. Whilst such moves are rare, it does go to show what can happen and the importance of the right risk management strategy to protect you.

In a week which saw major market data releases very thin on the ground (not uncommon for August holiday season), a brief nudge up by less than half a per cent was enough to achieve the milestone of an 18-month peak. Movements over a turbulent last 18 months are shown in the chart below:

GBP-Euro briefly revisted pre-pandemic levels last week.

The main taking point in terms of UK numbers last week was the release of the latest GDP figures for June, out on Thursday morning. As the easing of restrictions continued, the economy grew for a fifth successive month with 1% for June almost doubling the 0.6% seen in May. This all comes despite the complete removal of lockdown restrictions not taking place until mid-July, but the “Euros factor” from the football in the latter half of June is likely to have helped! Expectation will be high for the July figures released in mid-September for even further growth.

Overall the figures for Q2 showed the economy grew by 4.8% between April and June. This was (somewhat unsurprisingly) fuelled by the retail sector, restaurants & hotels, many of which were severely impacted by the restrictions during the previous period. Despite the positivity, the figure was a fraction under the 5% expected by the Bank of England, whilst the economy remains 4.4% smaller than pre-pandemic levels. Many analysts are now expecting to get back to such levels in October.

In one of the few major data releases last week, we saw the US producer price index jump by 1% for the second successive month, having jumped 7.8% for the 12 months to the end of July. This data measures the price of finished goods before they reach consumers. The consumer prices themselves have risen by 5.4% for the same period, with the Federal Reserve still keeping a close eye on such figures.

Jerome Powell maintains that the inflation situation in the US is “transitory” and he is probably right, but if we had a Pound for every time the word was mentioned on the Bloomberg news channel over the past week, we would definitely be onto a winner! There have been some truly staggering inflation figures within that 5.4%, from milk up 8%, rolled steel up 23%, fuel up 42%, new cars up 6% but used ones up an incredible 42% as the shortage of microchips in recent months for new cars has driven demand for second-hand vehicles. GBP-USD moves last week are shown below.

A relatively steady week on Cable last week.

Outside of that, it was a relatively quiet week until late on Sunday evening when Canadian Prime Minister Justin Trudeau, decided one G10 election wasn’t quite enough for September 2021. Just six days before Angela Merkel’s successor is decided after sixteen years of her reign as the German Chancellor, Canadians will go to the polls.

With the snap election called by Trudeau for 20th September (two years ahead of schedule), a quick-fire election campaign trail will start immediately. Recent polls have indicated his minority Liberal government could well be close to reaching a majority. With Canada now facing its fourth wave of coronavirus cases, Trudeau declared that “Canadians need to choose how we finish the fight against COVID-19”. His opposition leaders were quick to criticise an election called in the midst of a pandemic.

For this week coming there are more economic data releases than in the last, so we can expect economic fundamentals rather than COVID-related news to be the main drivers, or at least that should be the case.

Tuesday will be a busy one with the minutes from the latest Australian Monetary Policy Meeting released overnight (UK time). Further lockdowns and increases in the spread of the delta variant in Sydney and other state capitals, will almost certainly make the print, which could also have a knock-on effect on hiring, thus wage growth and in turn inflation. These are all concerns of the RBA of late, and the recent spread of the virus may cause a rethink on their bond-buying stance too.

First thing UK time we see unemployment figures, which of late have been demonstrating good results. With the UK at record hiring levels recently, will unemployment and claimant count data for June reflect this or will we have to wait until July for the full extent of the improvement. The Eurozone GDP figures for Q2 follow at 10am, with a “steady” expectation of 2.0% forecast.

As is often the case, the afternoon focus switches to the US with core retail sales (excludes vehicle sales) for July expected to show growth of 0.2%, whilst those including vehicle sales expect a contraction of -0.2%. In the evening, Jerome Powell speaks at a virtual town hall event, where all eyes will be pinned to any comment he makes regarding tapering, although these are likely to be held back for the Jackson Hole Symposium later in the month.

Wednesday could well see a central bank raising interest rates (first time I have had to write that in a while!), courtesy of the RBNZ in New Zealand. With unemployment back to where it was prior to the pandemic (4.0%), we are likely to see a 25-basis point rise to 0.5%, which will also start to control the housing market bubble. Whilst the rise is very much priced in by markets, the “search for yield” is likely to make the Kiwi an attractive source for investment ongoing. Markets will be watching the news from Wellington at 3am UK time.

More action follows at 7am with inflation (CPI and RPI) from the UK, followed by house price data. That said, probably the highlight of the week comes in the form of the Federal Reserve’s Meeting minutes, released later in the evening. These will provide more information on the Fed’s “tiptoeing towards a taper” from their most recent meeting of two weeks ago. As mentioned already, these may well set the scene for later in the month at Jackson Hole.

So, after a quieter week last week, we have a much busier one data-wise for the week ahead. Planning ahead and sticking to your strategy is key with major events like these, so if you have pending requirements coming up then make sure to reach out to the team and we can look at the best approach.

Enjoy the British summer, just let me know when it starts……

Have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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