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ACM Update Monday 19th July 2021

Last week we saw GBP reach a three-month high, but rates moved back down quickly later on (almost as rapid a reversal as Boris Johnson’s isolation plans yesterday). The UK is now re-opening, but is the easing of restrictions being done in such a way that it wont harm sterling with future lockdowns? The threat looms large and markets are nervous…..

The "final" stage of reopening arrives today in the UK.

After the disappointment at Wembley last Sunday, Boris Johnson lifted the mood slightly and confirmed the news that many people have been waiting almost 18 months for. The widely expected announcement regarding the easing of restrictions led to GBP making slight gains against the Euro throughout the day, but not necessarily against all majors.

Temporarily at least, the move created some positivity behind the pound again, and during the week pushed GBP-EUR to its highest levels since just after Easter. However, with case rates climbing rapidly even prior to the end of restrictions, it may not necessarily all be one way traffic for sterling over the coming months. By the end of the week, GBP was back down a cent versus the Euro as illustrated in the chart below:

Three-month highs rapidly gave way after nerves about the easing of restrictions in the UK.

Back to more fundamental economic data on Tuesday morning, which saw the release of the Bank of England’s biannual Financial Stability Report. The document painted a relatively positive picture for the UK economy, determining the banking sector as having both the capital and liquidity to support the wider economy. It noted that risky asset prices are continuing to increase, but this is likely due to investors on a “search for yield” in an environment of low interest rates.

Once again, inflation figures were the main stories of the week in both the UK and the US. Starting Stateside on Tuesday we saw US inflation reach a 13-year high, climbing to 5.4% (year on year). This puts the Federal Reserve in a difficult position as despite their insistence inflationary pressures are transitory, the major banks do not seem to agree.

ING for example are now forecasting US inflation will remain above the 4% mark for another 6 months plus, as well as expecting tapering to be announced in August by the Fed. If this does happen, we could well see a strengthening Dollar over the coming months, so any USD buyers should take note. Whilst prices around their current levels might not seem as attractive as we have seen in late May and early June, the situation could certainly get worse. GBP-USD figures last week are below:

The recent Dollar strength continues.

Inflation data for the UK was also released during the week, with an expected rise to 2.5% (YoY) in consumer prices. The main drivers behind this were in the transport, restaurant and food sectors respectively. Andrew Bailey believes this shift to be transitory and is stating figures could reach 3% but not much higher. The ever-hawkish outgoing MPC member Andy Haldane however thinks 4% is a likely occurrence.

Probably the biggest surprise announcement for a while in terms of monetary policy came from New Zealand last week. As the country continues its robust approach to the pandemic, the Reserve Bank of New Zealand announced that it will be ending its bond buying scheme by the 23rd of July. Such a move has led to speculation of an interest rate rise as early as their next meeting in August. The NZD made gains off the back of this, a trend which is likely to continue. As mentioned already above, the current “search for yield” globally could lead to the NZD being well bought by investors over the coming weeks.

On the topic of proactive central banks, the Bank of Canada had their latest meeting last week too. Their tapering continues with bond buying being reduced further as the vaccine rollout and the easing of restrictions continues. Most indicators lead currently to the economy expanding and moving forward post-COVID. Interest rates remained unchanged at 0.25% which was widely expected.

Unemployment data was the name of the game on Thursday, with data first from Australia then the UK. The Australian economy has made positive strides, with the unemployment rate unexpectedly falling from 5.1% to 4.9%. Good signs for the economy overall, but hopefully the recent increase in cases in Australia doesn’t erase all of the recent good work. In the UK, unemployment also showed positive signs, with the recent easing of restrictions leading to more and more hiring in the post-pandemic world. The actual market data for May however (albeit now somewhat outdated), fell short of expectations.

Friday saw retail sales figures land from the US, beating expectations and leading to slight Dollar gains throughout the afternoon.

So, its Monday 19th July and “Freedom Day” is finally upon us in England. Unless you are a number of members of the UK cabinet who are self-isolating after contact with Sajid Javid, after he tested positive for Coronavirus. Ironically, only 48 hours before Javid had been speaking in Parliament about how the easing of restrictions would underpin the economic recovery.

Case numbers seem to be on a sharp incline again which is a definite concern, and it remains to be seen how things will unfold. Equally concerning are the number of major businesses facing operational issues from staff members having to self-isolate through close contacts, one instance putting an entire London Underground line out of service of Saturday afternoon!

One important point to cover is that there are bank holidays in the UAE and many other middle-Eastern countries all week. This will mean no settlement for currencies such as AED, QAR etc. until post the bank holidays on Monday 26th July.

On the whole this week it is actually a relatively quiet one in terms of fundamental market data, with most of the big-hitting releases coming on Thursday and Friday. The ECB kick that off on Thursday lunchtime with their latest monetary policy meeting. With virtually zero chance on movement on their interest rate, attention will be towards their PEPP (Pandemic Emergency Purchase Programme) for any amendments. Inflation remains low which will likely be another topic to look out for, especially in the subsequent press conference.

Friday is really the main day for data. UK retail sales are first up in the morning, which are likely to again remain buoyant as shops reopen and UK consumers seem more than happy to open their wallets of late! Expect a strong figure for June in my opinion.

A raft of European manufacturing and services PMI data come next with the German manufacturing figure the pick of the bunch. A favourable figure last month could potentially see the same for this? We wait and see.

We have received a lot of questions recently regarding our expectations for sterling over the coming weeks. I asked my colleague Jon Bulloch, who has 25 years’ worth of foreign exchange experience under his belt, for his thoughts:

“The problem for sterling bulls is that the sentiment advantage that the pound had over its peers has been whittled away, akin to our Euro hopes. The UK’s vaccine rollout did boost sentiment, but this has faded as the US and Europe have caught up and the UK government delayed the ending of Covid restrictions to 19 July. This may not undermine the economic outlook but it could have tempered sentiment.”

So still favourable conditions for the pound but as the rest of the world catches up on the vaccination front, will GBP’s recent advantage start to disappear also. Only time will tell, but it is important to not play “wait and see” with regards to foreign exchange exposures. Reach out to the team this week and we will be happy to help.

Have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management