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ACM Update Monday 27th September 2021

Whilst the fuel and gas crises dominated headlines in the UK, the Federal Reserve held fire on any changes for now and the Bank of England followed suit. Both are edging closer to action though. Canadians and Germans cast their ballot papers in the same week, with no clear majority in either country. As we see Q3 of 2021 drawing to a close, the question is what will it bring to markets?

The fuel crisis dominated headlines, but for now hasn't impacted GBP too much.

After “the election nobody wanted” last Monday, Canadians woke up to a very similar political landscape to that which has governed them for the last two years. Despite the snap election being called at such short notice, the 36-day campaign cost more than CA$600m (£347m) making it the most expensive in the country’s history.

Justin Trudeau’s Liberals party ended the day with a minority government having fallen 11 seats short of the 170 seats required. They also lost the popular vote by circa 200,000 ballots. Canadian politicians will again be forced to work together to get the country through its latest wave of the pandemic.

Meanwhile the RBA (Reserve Bank of Australia) set out their latest minutes on the economy. The latest picture seems to be that conditions will not be right for an interest rate rise before 2024 at best. The delta variant has been a major factor in this but hopes are that the economy will improve as vaccination rates increase. There remains “considerable uncertainty” about the current pace of the recovery. Figures also released last week showed a slowdown in confidence in services sector PMI figures, whilst manufacturing holds strong for now.

For GBP-USD, there was much hype leading up to last Wednesday’s Federal Reserve meeting. With Jerome Powell and co continuing to kick the can down the road for some time regarding tapering, they have now declared they are “ready” to begin tapering their massive bond buying scheme by the end of the year. The baton of expectation now gets passed to the November Fed meeting….

It seems that markets were expecting a little more from the speech, but the knee-jerk reaction of weakness was quickly reversed as the trading day came to a close. Movements over the last week on GBP-USD can be seen in the chart below:

The Federal Reserve (Wed) and Bank of England (Thu) were the main market drivers this week.

Thursday was all about the Bank of England, and as mentioned in last week’s market update they are in a difficult position with the recent move towards the “stagflation” of the UK economy. The Bank now see inflation temporarily (another word for transitory in my books) rising to “above 4%” by the end of the year. The situation has shifted expectations of an interest rate rise to February 2022, with some analysts expecting a hike by the end of this year to cool inflation. The next MPC meeting on Thursday 4th November now becomes of far more interest (excuse the pun) to markets than it was prior to this one.

Despite two members of the committee now voting to scale back the quantitative easing scheme, fundamentally the Bank did nothing at all (as was expected). However, the mere possibility of an interest rate rise in the near future was enough to add circa half a per cent to the value of GBP versus the Euro (as shown below). Good news for savers perhaps, but is cooling inflation going to come at a cost to already sluggish retail sales and growth figures? Only time will tell on that front.

Again, Thursday's Bank of England was the main positive driver for GBP.

Yesterday gave us the German election, to determine the successor to Angela Merkel’s sixteen years as the German Chancellor. Her ruling conservative CDU/CSU party gained 24.1% of the vote but were narrowly defeated by the Social Democrats (SPD) led by Olaf Scholz, on 25.7%. The Green party meanwhile achieved 14.8% of the vote, their best ever. The situation now means that both of the leading parties will try and form a three-way coalition government of their own, potentially with the Liberal and Green parties.

One certainty is that Mrs Merkel will be in power for a good while yet until these negotiations are finalised, which could take months. With Germany the Eurozone’s powerhouse, the longer these drag on the worse it could be for the overall strength of the Euro. Definitely something to watch out for over the coming weeks.

So as we edge into the last few days of Q3 of 2021 (where does the time go), politically and economically there are a number of events to look out for. Quite how long the panic buying of fuel in the UK over the last few days will go on for remains to be seen, but the situation will undoubtedly impact sterling the longer it does. All corners of the economy are feeling the effects of a lack of fuel, so economically speaking a swift resolution will certainly be key until supply can meet demand again.

With the final days of the month to come, Thursday afternoon will likely be volatile as global portfolio managers look to balance out their positions before the close of play. Being the end of the quarter as well, this is of greater significance before we march into Q4. These never follow a set logic, so make sure not to be caught out with any trades required over the coming week.

In terms of fundamental data releases, the week ahead is quieter than the electoral and central bank fest of the one just gone. Australian retail sales for August are the first to be released early on Tuesday morning. Amid heavy restrictions and lockdowns over recent months, we are likely to see further declines in this sector to follow the drop of 2.7% last month. A similar figure is predicted this time.

Wednesday sees the European Central Bank’s latest forum taking place virtually. The “Policy panel” element at 4:45pm UK time sees arguably four of the most influential banking heads answering questions. Christine Lagarde (European Central Bank), Jerome Powell (Federal Reserve), Andrew Bailey (Bank of England) and Haruhiko Kuroda (Bank of Japan) will all be present. Any hints towards upcoming policy moves (especially from Powell & Bailey) will be closely monitored by markets, so keep an eye out for movement.

Thursday provides us with the final GDP figures for both the UK and US economies for the quarter to the end of June. These are expected to have grown by 4.8% and 6.7% respectively as the post-pandemic rebound continues. Friday meanwhile gives us the first clues as to how the manufacturing sector in the UK, Eurozone and US continued to recover in September. Will the microchip shortage and shipping issues continue to impact the sector?

So there was plenty going on last week, but with less than a hundred days until the end of the year planning ahead is as important as ever. GBP has lost ground versus the Dollar in recent weeks, including a 2% shift downwards in the space of six working days. If you have upcoming requirements, make sure to reach out to the team and we can work to help you budget effectively.

Stay safe and have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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