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ACM Update Monday 5th July 2021

As expected, GBP has spent the first half of the year enjoying its “post-Brexit boost”, with the trade negotiations of late last year no longer weighing heavily on sterling. The vaccination rollout has also helped matters hugely, but GBP has been pegged back in the last few weeks against a resurgent US Dollar. Stability seems to be more the order of the day versus the Euro, but the picture isn’t as clear cut as we go into Q2 of a still very uncertain 2021.

A much quieter week than we have seen of late last week, with even the biggest event of the week (and arguably month) from the US still not causing much by the way of market movement. GBP has been in a narrow range recently versus the Euro and remained that way last week, taking us to eight weeks within a two-cent range. GBP-EUR movements (or more accurately the lack of them) last week are shown in the chart below:

Narrow trading last week for GBP-Euro.

GBP has seen much more volatility of late versus the Dollar however, with over a 5-cent move down in the last month alone. Economic stimulus from the US and suggestions starting to emerge around tapering from the Federal Reserve have all helped the Dollar in June. That said, the 12 months until the start of June 2021 had seen a 20-cent gain for sterling versus the Dollar, so prices are still very much towards the upper end of the range.

Tuesday saw data demonstrating the continued buoyancy of the UK housing market, as low interest rates and stamp duty holidays have provided extra purchasing power for buyers. Approximately 1.3 million buyers have so far made savings through the stamp duty holiday and mortgage approvals continue at pace, but it will be interesting to see if the boom continues now the scheme has come to an end. For now though, Nationwide’s house price index demonstrated growth of 0.7% for June.

Figures released on Wednesday saw the UK’s first quarter GDP confirmed as -1.6% which was a shade worse than estimates, but fortunately the picture has been more positive since then. The “pent-up demand” I have referred to numerous times previously is now most certainly in full swing, especially if the streets around our new office are anything to go by!

Meanwhile inflation in the Eurozone saw a slight drop back down to 1.9% from 2.0% the month before. This may have been skewed though by oil prices starting to drop, whereas last June they were rising considerably, so expect inflation to rise back above the ECB’s target in next month’s figure.

On the subject of inflation, Andrew Bailey last week took time to disagree with outgoing MPC hawk Andy Haldane on the matter. The Bank of England Governor is keen not to derail the recovery by taking immediate action to combat inflation, maintaining that the figure will indeed have a period where it runs higher than target. He used the current central banker inflation buzzword of “transitory” once more.

All this led us up nicely to the first Friday of the month, which as always means Non-Farm Payrolls data from the US. The figure reports the change in the number of people employed in the US during the previous month, excluding the seasonality of the farming industry. After a couple of months under expectation, we saw 850,000 jobs added versus an expectation of around 700,000. Normally one would expect further Dollar strength from this, but the unemployment data released in parallel actually showed the unemployment rate in the US had got worse overall, hence why the pound recovered a little ground in the afternoon as shown below:

A slight recovery on Friday afternoon as US unemployment came in worse than expected.

So to the week ahead now and Monday starts off with a raft of Services sector PMI figures from the Eurozone and the UK. Recent months have continued to show good levels of recovery in the sector, with employees slowly starting to return to the office. The UK has been leading the growth of late, again likely helped by the easing of restrictions, although the delay to the final restrictions being eased may have hampered growth in June.

It is also important to note that Monday is a Bank Holiday in the US as Americans celebrate Independence Day. This will likely lead to lower trading volumes globally, thus the above data releases on Monday may have more of an impact than usual.

The early hours of Tuesday morning sees the latest RBA (Reserve Bank of Australia) meeting. As with recent months, there is unlikely to be any movement on their interest rate stance, perhaps for as long as two years still. Bond buying is expected to continue at pace, however progress has been made on unemployment, which has now moved back to pre-pandemic levels. Also, a cause for concern over in Australia will be the current range of lockdown measures imposed on most major cities. This comes as the country tries to deal with outbreaks of the highly contagious Delta COVID variant, so we could well see the AUD weaken further over coming weeks as a result.

Continuing the theme of central bank meetings, we have the Federal Reserve minutes as the standout event of the week on Wednesday evening (UK time). Following on from their vague comments in mid-June (“time to think about thinking about tapering”), will we see more clarity in the meeting minutes from Jerome Powell and the other members of the committee? The USD has enjoyed a strong month against sterling, with gains of over 3% throughout June, only the second month in the last nine in which it has made a gain. For now, it certainly looks like the Dollar is in the ascendancy, despite the underwhelming market reaction to the non-farm data.

Thursday sees the release of the minutes from the latest ECB meeting in early June. This will give further clues as to the stance of the committee and their potential plans for controlling inflation, which is likely to increase in line with other major economies. Despite the information being from four weeks ago, traders will still look to it for clarity. G20 Meetings will round out the week and will be closely watched as usual.

As mentioned, the second half of the year is far from clear in terms of which currencies will gain or falter, which makes plotting your foreign exchange budgeting for the year as challenging as ever. As a team we have a raft of different methods at our disposal which we can use to help you “de-risk” your foreign exchange exposures. Please do reach out to us as now is the perfect time to establish a plan for the second half of the year.

Enjoy the week, and hopefully we get to see Sterling in the ascendancy vs EUR on Sunday night at Wembley……

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management