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ACM Update Monday 10th May 2021

Elections in the UK saw gains for the Conservatives, a shadow cabinet reshuffle for Labour and a second Scottish independence vote coming back into focus. Meanwhile in the US, the long-awaited jobs report for April fell spectacularly short of expectations. Will GBP continue its wobble against the Euro, but continue to gain versus the Dollar?

The UK went to the polls last week.

Whilst the week started with a typically gloomy and rainy bank holiday Monday in the UK, most of the world was hard at work. Other bank holidays of note included Labour Day in China (1st to 5th May) and the Golden Week holiday in Japan (29th April to 5th May).

Elsewhere though there were plenty of data releases to keep markets busy. We started with a raft of Eurozone countries releasing manufacturing PMI data for April, all coming in relatively as expected apart from the Spanish figure. This dragged down the overall number for the Eurozone which was a contributory factor in GBP rising against the Euro on Monday.

Jerome Powell continued to reaffirm his optimistic outlook for the US economy. He stated, “the economy is not out of the woods yet but is now making real progress” and that currently the US is “reopening, bringing stronger economic activity and job creation”. Financial markets though viewed this as not to expect interest hikes any time soon from the Fed.

By Tuesday though, Janet Yellen caused a real stir with comments about potential interest rate rises. She implied that rate hikes may be needed to control the Biden stimulus package’s impact on inflation if it starts to rise well above target. In a period of effectively zero interest rates worldwide, her comments sparked a major sell off in stock markets but a temporary boost to the Dollar.

On the other side of the world the RBA (Reserve Bank of Australia) Governor Philip Lowe continued the stance of keeping their own interest rates on hold. If they stick true to their comments of late last year, this is expected to be the case for several years yet as growth continues in the Aussie housing market. The ongoing talks with China over economic partnerships seem to be the main mover for the AUD still, which last week came to an abrupt halt, hurting the Australian Dollar.

By Wednesday it was time for more Eurozone-focused PMI data, this time from the services sector. The figures came in slightly under expectation in some areas and were enough to move GBP upwards throughout the day.

These were all warmup acts for the major events in the latter part of the week. “Super Thursday” in the UK, which consisted of a Bank of England meeting followed by a string of local council elections in England, plus Scottish and Welsh parliamentary elections. The Bank of England kicked things off by raising their growth forecast for the UK economy from February’s estimate of 5.0% up to 7.25%. followed by the announcement that they are starting to slow down their bond buying. They still used a very cautious tone though, whilst GBP see-sawed against other majors as the announcements were digested. The movements for the week against the Euro are shown in the chart below:

GBP-EUR traded in a narrow range, but was at its best midweek.

For the end of the week, the stage was left for the US to deliver the long-awaited non-farm jobs data for April. This is almost certainly the best indicator of growth for the US economy. A month ago, we saw 916,000 jobs added, leading to expectations of over 1m jobs being added to the economy during April. Unfortunately, the figure came in as a lowly 266,000 which saw cable climb throughout the afternoon up to the hallowed 1.40. A sign of things to come? Movements for GBP-USD during the week are below.

GBP-USD moved strongly off the back of Friday's non-farm data.

Over the weekend we saw results filtering through from the respective elections in the UK. In England, the Conservatives made sizeable gains, prompting a shadow cabinet reshuffle from Sir Keir Starmer. In Scotland, the SNP finished one seat short of an overall majority, meaning the market jitters around a second Scottish referendum may well start to reappear, despite this being unlikely to happen for some time. In Wales, Labour will remain in power for another five years having matched its best Senedd election result. Boris Johnson was quick to tell Nicola Sturgeon to focus on the pandemic and not a second referendum, but the matter now being closer to a “when” rather than an “if” could well hamper GBP short term. Definitely watch this space….

After all the major events of last week, the week ahead for the UK at least will initially be a case of how markets react to the political ongoings of the weekend. Sterling touched 1.40 against the Dollar after the non-farm figure on Friday but the election results could change that course slightly. We wait and see.

The main starters for the week come from Australia with retail sales figures and their annual budget release. By Tuesday afternoon, all eyes will be on Bank of England Governor Andrew Bailey, for more clues regarding the bank’s interest policies going forwards. The cautious tone is likely to continue, but with the UK economy continuing to perform well and the next stage of lockdown easing set to be confirmed for next week, the picture is continuing to get brighter. GDP, manufacturing and construction data all first thing on Wednesday morning will give further clues as to the UK’s recovery.

In theory, a large non-farm figure on Friday would have meant all eyes on the US CPI inflation figure this week, but the miss for the jobs data means the Federal Reserve are off the hook a little for now. Will we start to see bond yields increasing again on Wednesday evening as a result? If you have Dollar requirements upcoming, then it is vital to talk to the team during the early part of the week to protect yourself from these events.

The Bank of Canada Governor Tiff Macklem is likely to speak more about their tapering during his Thursday press conference, with CAD benefitting from the recent change in monetary policy. Friday sees the minutes of the last European Central Bank meeting released, but chances are they are a good distance away from the same stance as their Canadian counterparts. US retail sales close out the week, which will give further clues as to the health of the economy, fingers crossed for a better showing than the non-farm seven days earlier.

Overall, we did see some gains for GBP this week against the Dollar, but versus the Euro things started to slip back after the positivity of the first half of the week. What we can say currently is that GBP is going to have a turbulent few weeks after the Scottish election result, but the next stage of lockdown easing being confirmed could help counteract that, albeit temporarily.

As always, nobody has a crystal ball for the FX markets, and as a result it is always vital to plan ahead and have a strategy in place to reduce risk. Tools such as forward contracts give the security of locking in a rate of exchange, combined with a set line in the sand to make budgeting for the second half of the year that bit more transparent. Reach out to the team today for more information.

Have a great week!

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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