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ACM Update Monday 12th July 2021

A mixed bag last week for sterling meant a slightly negative few days against both the Euro and Dollar, not helped by slow economic growth figures released for the UK. On the other side of the equation, GBP made gains versus the Australian Dollar and other weakening commodity currencies. We have several major data releases this week, so what will these events hold?

Away from all the footballing happenings of last week, the focus of the currency markets remains very much on economic recovery across the globe. Figures released by the Office for National Statistics last week showed a month on month slowdown in growth in the UK. Despite four consecutive months of growth now, the 0.8% expansion recorded failed to match the 2.0% seen in April and also fell short of the forecast 1.5% for May.

With the hospitality sector being boosted by the reopening indoors of pubs and restaurants, we saw growth in the sector of 0.9%. But what dragged the overall numbers down was the well-publicised shortage of microchips hampering car production during May, alongside the wet weather hindering the construction sector. The figures did hinder GBP against the Euro slightly this week, as per the chart below:

With the US enjoying their Independence Day bank holiday last Monday, it was down to the raft of services sector figures for June to take centre stage. We are continuing to see growth in the sector overall as restrictions ease, and from the range of Eurozone figures only the German number fell a fraction under expectation. The latest stage of unlocking in the UK helped the pound to a healthier figure than the other side of the Channel.

The RBA in Australia were the first central bank release of the week. Their picture remains very similar to previous meetings, with further forward guidance that we will not see any interest rises until inflation is “sustainably within to 2 to 3 per cent range” to quote Philip Lowe. With slow wage growth in the country (which has been the case since 2013), the bank doesn’t expect to be in a position to amend interest rates until 2024.

Philip Lowe also highlighted that there is a possibility the current border closures in Australia (which are expected to remain the case for another 12 months at least), may actually help drive wage growth if they remain in place. The lack of the usual supply of migrant workers, could start to boost wages of those skilled workers who can fulfil the roles. Watch this space, but last week we saw the best prices in circa 14 months on GBP-AUD, an excellent buying opportunity.

Over to the US on Wednesday, and one of my favourite headlines from last week described the Federal Reserve as “tiptoeing to a taper”, which I think sums the situation up well. The minutes from June’s latest Fed meeting were released on Wednesday night and the word “transitory” made its usual appearance regarding inflationary pressures over the coming months.

Regarding their current stance on tapering asset purchases, the Fed’s position was that “substantial further progress was generally seen as not having yet been met”, so for now the wait and see still goes on. Focus remains on the job market and the Fed are likely to wait until they reach their “maximum employment goal” before taking any action.

All in all, a mixed bag of a week on GBP-USD, but we saw a strong close on Friday for the pound as seen in the chart below:

The ECB were the other major player with an announcement last week and we saw some action in terms of a change in its own inflation target from “below but close to 2%”, to 2%. This might sound insignificant but is quite a change from the ECB, and whilst some saw it as moving the goalposts as inflation rises, most saw it as easier to communicate to financial markets. They also expect inflation to show a short-term rise as markets reopen post the pandemic (once again, transitory).

Another talking point was the fact that the bank seems willing to amend their own rules in order to allow for further expansion in its massive stimulus programme. This is despite German politicians concerns that printing billions of extra Euros this year will lead to inflation spiralling out of control. The ECB as with most central banks are between a rock and a hard place at the minute.

So that was last week, but what about this one. I have already been asked by a few clients if the England football team making it all the way to the final might provide a boost to the Pound! Initially probably not if I am totally honest, but the boost in consumer spending could well provide some healthy growth figures over the coming months for the economy.

Monday’s main event comes from the US in terms of the US 10-year bond auction, which should set us up with a clear insight of what to expect from the Dollar during the week and indeed the weeks ahead.

The following day we have the release of the Bank of England’s biannual Financial Stability Report, presenting an overall view of the UK economy. Whilst not the biggest release of the month from the bank, it will provide further clues as to the health of the economic recovery in the UK. This may also provide clues as to potential monetary policy from the Bank’s MPC members.

Inflation (CPI) figures are released from the US later in the afternoon, with the latest insight as to the direction of travel for consumer prices. Whilst the Fed have made their own high-profile allowances for inflation to increase over the coming months, this has not yet proved to be the case. The expected figure for June is 0.5% so it will be interesting to see how this plays out.

Closely following on Wednesday morning is the UK year on year CPI inflation figure, expected to come in at 2.2%. This rise above 2% is only expected to be temporary, but any surprise rises may well cause concern for Andrew Bailey and co. It is also worth noting that Wednesday is a bank holiday in France for Bastille Day.

In the afternoon our focus will switch to the other side of the Atlantic. Firstly, we will see the Bank of Canada providing its own monetary policy report and rate statement. Leading the way on the tapering front, the BOC are likely to continue with further tapering after favourable recent jobs data. Interest rates are almost certain to remain on hold.

The evening will see Jerome Powell testifying in Washington D.C., before the Fed’s Beige Book is released. This document forms one third of the analysis the FOMC (Federal Open Market Committee) uses when it comes to its next interest rate decision in two weeks’ time. The other two documents (Green Book & Blue Book) are not published, so the document gives some clues at least as to what may happen in the next Fed meeting.

Powell has the second part of his testimony on Thursday, before Friday sees US retail sales close out the week. After a drop last month, it will be interesting to see if people are back to spending mode again in the US to get the economy moving.

So as mentioned last week we are into the second half of the year now which is a vital time to think about your strategies for foreign currency purchases for the remainder of 2021. In the first half of the year, we saw GBP-EUR move over 7% and GBP-USD almost 6%. These percentages can make a big difference if you find yourself on the wrong side of a market movement, so get in touch to understand how we can remove the risk from your purchases.

We can never profess to predict market movements, but we are able to look at your “big picture” and establish some solutions to reduce your risk.

Have a great week.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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