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ACM Update Monday 2nd August 2021

As Team GB continues to do well over in Japan, GBP also continues its recent resurgence in the currency markets. Last week, an updated growth forecast for the UK economy provided a very helpful boost, meanwhile on the other side of the Atlantic the Federal Reserve are still tentatively tiptoeing towards a taper.

With medals from the pool to the BMX track via the trampoline, Team GB continues to perform well over in Japan. In the markets, sterling has had a good week versus the rest of the FX world too, as July drew to a close.

The main positive factor for GBP last week came on Tuesday afternoon, with news through from the IMF regarding its forecast for the UK economy. During the most recent April assessment with restrictions just starting to ease, the picture had been far more uncertain and led to quite a conservative figure. But with vaccination progress and further easing of restrictions, the forecast for growth in 2021 has been revised up by 1.7%.

This brings the UK forecast for 2021 up to 7.0%,in line with the US and the joint highest growth rate of the major advanced economies. For 2022 though, the figure was revised down a fraction to 4.8%. Overall, the picture painted by the IMF is now more aligned to the figures forecast by the Bank of England. GBP enjoyed a Tuesday afternoon jump as a result, as shown below versus the Euro:

Tuesday afternoon's jump clearly shown on the GBP-EUR chart from last week.

In terms of core market data, the main event of last week came from the Federal Reserve in the US. Whilst monetary policy was left unchanged, the language used by the Fed is starting to change. As expected, there was plenty of chatter regarding the “transitory” inflation situation, but outside of that there was a more optimistic tone.

As with recent Fed meetings the key information was in the wording used, with the main takeaway statement regarding maximum employment and inflation being, “the economy has made progress towards these goals”. This may not sound like much but does show the Fed are edging towards tapering their current stimulus scheme. All eyes are now on the Jackson Hole Symposium meeting of central bankers at the end of August, for more clues as to when the taper might take place.

What does all this mean though? With the US recovery continuing despite some concerns regarding the Delta COVID variant, expectation is rising for action from the Federal Reserve. Once we do see action, the Dollar is likely to become much more attractive for foreign investment and lead to better times ahead. So, any Dollar buyers should see current levels (despite not quite being the psychological 1.40 level) as a good buying opportunity. The chart below covers movements over the last month:

Good levels for Dollar buyers as we move into August,

Whilst many countries are for now seeing falling COVID case numbers, Australia is experiencing widespread lockdowns which are causing concern to the economy. Inflation data for the quarter ending June came in slightly ahead of expectation at 0.8% but wage growth is still struggling. These factors combined with positivity on the UK side of the equation pushed GBP-AUD to a 14-month high last week.

The Eurozone also saw better news in the latter part of the week, with the economy growing by 2% in the second quarter and thus emerging from recession. Some of the strongest growth in the bloc has been in Portugal where softer travel restrictions allowed for more tourism and 4.9% growth. The largest economies of Germany and France only grew 1.5% and 0.9% respectively though. Inflation data for the Eurozone is now also at 2.2% according to the latest CPI Flash Estimate.

So somehow, we already find ourselves in August and the first week of the month gives two of the biggest events of any month, with a Bank of England Meeting and Non-Farm Payrolls data.

Monday begins with a host of manufacturing PMI figures from Europe and the US, whilst Canada enjoys a bank holiday for Civic Day. The PMI figures will give clues as to the performance of the manufacturing sector, a leading indicator for overall economic health.

Following on from the weakening AUD last week and recent COVID case increases, Tuesday’s RBA meeting will increase in significance. Will Philip Lowe & Co feel the need to change their forward guidance or their current bond buying stance? We shall find out in the (very) early house of Tuesday UK time.

After a host of services sector figures from all corners of Europe for July released on Wednesday morning, the focus will then be shifted to the Bank of England’s monetary policy committee meeting, taking place in it’s usual Thursday at noon slot. Andrew Bailey and the other members are likely to strike a “cautiously optimistic” tone, as whilst the economy is performing well, the Delta variant is still creating uncertainty.

The economic picture is still too muddy for any further hints at future interest rate hikes, and also an early end to the quantitative easing packages seems a little premature for now. So the wording used will be closely analysed, more than the data releases themselves, which are extremely unlikely to show any changes.

With the Federal Reserve focused on “maximum employment”, Friday afternoon’s non-farm is more significant than ever. With expectations of circa 900,000 jobs added to the US economy in July, can the figures deliver? June saw 850,000 added despite restrictions not yet having eased, but with the US almost fully “reopened” now, a higher figure would massively boost the Dollar.

So GBP enjoyed a good week last week but the picture can change very quickly, least of all in these uncertain times. The week ahead has two major events, each of which have the possibility to cause a percentage point move for GBP or the Dollar, so by the end of the week the scene could look very different. Reach out to the team to discuss how we can help manage your upcoming transactions and protect you from foreign exchange risk.

Have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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