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ACM Update Monday 7th June 2021

“Time to think about thinking about tapering”…… That was the comment from a member of the Federal Reserve last week, in giving his thoughts on the bank’s current bond buying scheme. The US jobs market regained a slight footing after a better figure for May, albeit still below what was hoped. Meanwhile the UK reached 50% of the adult population now being fully vaccinated and GBP-USD reached highs last seen in April 2018.

In the UK we enjoyed the second Bank Holiday of May last Monday, with the US also doing the same for Memorial Day. This led to lower trading volumes globally with two of the major FX market hubs shut for the day.

The picture globally is now starting to shift more towards economic recovery from the pandemic, according to the latest report from the OECD (Organisation for Economic Co-operation and Development). Global growth for 2021 has been revised up to 5.8% from the 4.2% predicted six months ago, but the warning remains that this projected growth will not be shared evenly.

In the UK we are expecting to see growth of 7.2% according to the OECD (up from 5.1% forecast in December), mainly being attributed to the economic stimulus and vaccine rollout programme. Chancellor Rishi Sunak, aware that debt is nearly at 100% of GDP, still stressed the need to “ensure public finances are on a sure footing” in response to the statistics.

In Australia, interest rates were unsurprisingly kept on hold at 0.1% by the RBA last week, amid a positive outlook for the economy. Recovery was quoted as being “faster than expected” and supported by strong growth in the housing market. Expectations are for interest rates to remain on hold though until late 2022/early 2023, to help inflation growth which itself is being held back by slow wage growth. A challenging picture in Australia, which saw the AUD weaken and thus GBP at its best level since early November against the Aussie.

House price figures from Nationwide first thing on Tuesday morning showed that the UK housing market isn’t showing any signs of slowing up quite yet. With the end of the stamp duty holiday coming at the end of June though, one might expect that to start to slow over the coming months. For now though, interest rates at their historic lows are encouraging buyers to move and save themselves some stamp duty at the same time. Mortgage approval figures continue to climb. GBP versus the Euro last week is shown below:

Euro movements for last week.

Manufacturing PMI figures released for a number of Eurozone countries on Tuesday morning provided a fairly constant picture. All showed growth and in line with expectations, with the German figure standing out as the most improved. This is a good sign for the Eurozone, with manufacturing being the precursor to growth in a number of sectors. The UK figure on the other hand came in worse than expected.

Inflation in the Eurozone is now on the increase and up to 2.0%. As mentioned previously, this will be very closely monitored by the ECB over the coming months and will be a determining factor in a number of their upcoming policy decisions.

PMI figures for the Services sector were the order of the day on Thursday. With the sector making up a large proportion of the UK economy in terms of revenue, the UK figure being so positive was a great sign for GBP during the day. The various Eurozone PMI figures came in on or around expectation across the board, leading to very little movement.

The above events were really just warm-up acts for the US last week. As mentioned in recent market updates, the Federal Reserve have been very guarded/cautious/uncertain/undecided (take your pick) as to their upcoming monetary policy. With Fed member Patrick Harker last week stating that it is time for the Fed to “think about thinking about tapering”, frankly the picture is still as muddy as it has been as to their next course of action. They will need to follow other major central banks into tapering, but the question still remains when……

The bank are still printing $120billion per month to help stimulate the US-economy which remains a truly eye-watering figure. They are however already starting to wind down their corporate bond buying scheme, which albeit a much smaller figure, is a sign of policy action.

The Fed’s “Beige Book” on Wednesday evening also hinted to growing price pressures within the US economy. The document published two weeks before the next Federal Reserve meeting (15-16thJune), suggests the bank may have some recent information that could lead to policy action. Still a watch this space for now, but when the Fed speaks, the whole financial world listens.

Finally, the first Friday of the month can only mean one thing. Non-Farm Payrolls data from the US. Following last month’s (huge) miss, there was still an expectation for 645,000 jobs to be added to the US economy in May. The actual figure came in slightly under at 559,000 causing a slight weakening in USD. Average earnings figures continue to show improvement and the overall unemployment rate is steadily improving month by month, now down to 5.8%.

The last three years on GBP-USD. Since early 2020 it has been one-way traffic as shown.

With a 3-week high against the Euro, over three-year highs versus the US Dollar and over six-month highs versus the Aussie, GBP had a strong week last week. Definitely not one-way traffic but a strong week. If you have requirements upcoming that the trading team need to be aware of, then make sure to reach out and we will look at the best approach. Even if now isn’t the right time to move for you, if we are aware of the transactions needed then we can pick up the phone when applicable.

For this coming week, central banks to the fore with the Bank of Canada (BOC) and European Central Bank (ECB) interest rate announcements on Wednesday and Thursday respectively. The BOC are leading the way on tapering, whilst there seems to be still a lack of faith in the direction from the ECB. The Christine Lagarde press conference immediately after the announcement on Thursday lunchtime will be eagerly watched.

Whilst light on economic data releases this week, the prospects for the pound in the next two weeks are going to be led by the actions next Monday (14th) regarding lockdown easing. With the next stage planned for 21st June to be confirmed (potentially) on the 14th, any clues as to whether this is going to happen or not will be major factors in the direction for sterling. Cabinet members have been very cautious as to their wording of late, with the decision in the balance as a result of the various coronavirus strains on UK shores. The announcement in parliament next Monday will be critical as to the direction of travel against other majors. The UK also hosts the latest round of G7 meetings.

So a good picture for GBP for now, but hopes resting on Boris once again for further improvement. Get in touch with the team for more information. With Euro 2020 starting this week, hopefully the home nations can all achieve more than the “nul points” achieved by the UK in Eurovision recently….

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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