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ACM Update Monday 20th September 2021

Not the prettiest of economic pictures for the UK last week. Is the “transitory” inflation picture now turning more towards stagflation? A slowing economy, retail sales falling for their fourth month in a row and a sharp rise in inflation, suggest that this should be an immediate concern for the Bank of England in this week’s MPC meeting.

UK market data leaves the Bank of England in an unenviable position.

A very challenging economic picture is emerging for the nine members of the Bank of England’s Monetary Policy Committee (MPC) when they sit down for their next interest rate announcement this coming Thursday. A lot of the major economic indicators are pointing in opposite directions at the moment, not making life easing for the Bank to reach a decision which will both help stabilise and bring confidence to the economy.

Having previously suggested inflation could reach as high as 4% by the end of the year, the bank was dealt a surprise when the most recent figures released last week revealed a year-on-year increase of 3.2%. As is customary, Andrew Bailey had to write to the Chancellor explaining why the figure was over 1% above the Bank’s 2% target. Increased shipping costs globally have not helped, as well as some lingering Brexit-related uncertainty.

This puts inflation at its highest level in nine years and under normal market conditions, the bank might consider raising interest rates to curb inflation. But with the economy stalling in the July figures and retail sales continuing their fall, they can ill-afford such a move for fear of making matters much worse. Thus, we could well face stagflation – stagnant economic growth, combined with high inflation. Just to complicate things further, there are two new members of the nine-strong MPC committee this week, which adds even more uncertainty to the mix!

Also released last week, we had unemployment figures from the UK which for now at least are displaying a more positive picture. Unemployment now sits at 4.6% but with the furlough scheme coming to a close as of the end of September, this figure is expected to move back up. Having run with various percentages of cover since March 2020, the cost of the furlough scheme will come to around £66bn (according to the Office for Budget Responsibility).

Despite the incredibly confusing picture for the Bank of England, GBP was largely unaffected by the macroeconomic data releases. Prices against the Euro remained in a very narrow range, with movements of less than a cent throughout the whole week. General movements over the last six months are still GBP-positive though (as illustrated in the longer-term chart below), and any forward guidance on interest rate hikes from the Bank of England this Thursday, could well help that trend.

A gradual positive trend over the last six months for GBP-EUR, but ongoing uncertainty isn't helping.

US inflation figures were also released last week which showed a slight slowdown again on a month-on-month basis. This is good news for the Federal Reserve but must still be closely monitored. Retail sales bounced back again for the US last month, amid the continued uncertainty around the spread of the delta variant there.

All of the above was enough to cause some volatility in GBP-USD, with over a 1% gain for the Dollar in the second half of the week as the muddy picture for the Bank of England continues to perplex leading economists. For now, we are trending slightly downwards on the pair, as illustrated in the weekly chart below.

Around a 1% move downwards for GBP-USD last week.

Meanwhile, Australia and New Zealand’s economies produced some better-than-expected figures. Australian unemployment had been expected to rise to 5% but actually dropped to 4.5% in August, despite widespread lockdowns. New Zealand meanwhile produced strong GDP growth of 2.8% for the quarter to June, above analyst expectations of 1.1%. Despite this being a lagged figure, it does provide some much-needed economic positivity over in NZ.

Two major G10 elections top and tail the coming week, kicking off with Canada today. Prime Minister Trudeau’s snap election to attempt to gain a majority came as somewhat of a surprise, but the question remains if it has worked.

For European and UK audiences, the German election on Sunday is probably of more interest in determining the successor to long-time Chancellor, Angela Merkel. Opinion polls have shown three different parties as ahead at various stages in the process, so the vote remains incredibly open. Exit polls will begin to be released by broadcasters at 6pm (CET) on Sunday evening, but at present one of many coalition possibilities look the most likely outcome.

Even outside of electoral activities, we have a busy week in store. The Reserve Bank of Australia releases its latest Monetary Policy minutes in the small hours of Tuesday morning (UK time). These will give the latest clues as to the measures the RBA are taking amid the spread of the delta variant and the impact of lockdowns on the economy. Wage growth and employment figures remain a focus, although as mentioned the latter produced a stronger than expected figure last week.

The majority of activity on Wednesday will come from the Federal Reserve as markets look to Washington D.C. for more clues on upcoming policy. After the long-awaited tapering at Jackson Hole last month failed to materialise, the slowdown in the US jobs market since is unlikely to have helped matters further. A taper would be a (very) big surprise this month, but Powell’s words and answers to questions in the subsequent press conference will be as closely watched as ever.

Thursday morning delivers a range of manufacturing and services sector figures from Europe which are all still on the path to recovery post-pandemic. Andrew Bailey and co at the Monetary Policy Committee though will have some tough decisions (as mentioned above) in their midday announcements. What action can they take to avoid stagflation if any, or do they hope it will all just end up being transitory after all, with just a few minor adjustments?

Friday afternoon is curtailed by Jerome Powell providing a further speech at a Federal Reserve online event, but the majority of the substance is likely to be in his Wednesday evening conference. Then of course it is over to the Sunday German elections, with an election whilst FX markets are closed potentially leading to a lot of change from close to open prices over the weekend.

So there is plenty to keep an eye on in the week ahead regardless of which currencies you are exchanging. Those based around GBP should be wary of Thursday’ MPC meeting. Clients needing to buy or sell Dollars may be dependent on Jerome Powell on Wednesday night. Anyone with a requirement involving Euros should be aware of the possible uncertainty around the German election results.

All of the above demonstrate one thing, that markets dislike uncertainty. We do have tools to protect against uncertain currency movements though, so make sure to reach out to the team this week for further consultations on the best course of action. There is plenty going on!

Have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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