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ACM Update Monday 15th March 2021

We saw narrower trading ranges for sterling last week against a lot of the majors as markets primarily played wait and see. As has been the case recently, the ECB failed to make waves, but there was plenty to talk about elsewhere. With Biden’s stimulus bill now signed off, plus the Fed and Bank of England meetings both this week, was it just the calm before the storm?

Biden's stimulus package finally got signed off this week.

The 8th of March is not normally the sort of date pupils go back to school, but as we all know 2021 hasn’t been a normal year by any stretch. With infection rates falling in England, school started up again last Monday in the first stage of lockdown easing, with the intention to have all restrictions removed by late June. The path is now laid out and in a similar way to any data release, the FX markets will remain alert to any deviations from the plan.

Monday also saw the Bank of England Governor Andrew Bailey voicing his opinions regarding the current state of the recovery in the UK, commenting he saw “light at the end of the tunnel”. He wasn’t quite as optimistic as the Bank’s Chief Economist Andy Haldane the week before mind you, who chose expressions to describe the UK economy such as “a coiled spring”, “pent-up financial energy” and “firing on all cylinders by the spring”. Bailey also stated he hoped the recent government decision to extend the furlough scheme until the end of September, should help to limit the peak in unemployment.

Sterling-Euro had a quiet week overall, moving within a very narrow range of 0.6% (as per the chart below). However we also got to see the first release of import-export figures with the EU, since the Brexit transition. January’s figures showed a drop of just over 40% in the export of UK goods to the EU, the biggest monthly decline in 20 years. Imports also fell by around 29%. Despite the 11th hour fishing agreement that helped push the trade deal over the line back in December, exports of fish and shellfish plummeted by 83% compared to the previous January.

A quiet week for GBP against the Euro, but the week ahead is unlikely to be the same.

We also saw growth figures for the UK last week, with a 2.9% drop in GDP. Whilst not an impressive figure, it was in fact better than the minus 4.9% that markets had been pricing in for January, thus causing little impact to sterling. Could other UK data releases over the next couple of weeks be ahead of forecasts, it remains to be seen, but it is important to remember that GBP-Euro is still in an incredibly favourable position now compared to 6 months ago.

On the other side of the channel, the European Central Bank met last week. There has not been a huge amount of confidence in their actions recently, but the announcement that they expect to increase bond purchases “significantly” next quarter seemed to help. Bond yields fell, which will be a huge relief to those countries in the Eurozone already struggling with borrowing costs as a result of the pandemic.

Elsewhere in Europe, Italy is now seeing a third wave of coronavirus cases. This has led new PM Mario Draghi to impose further lockdowns for a large part of the country from today, with the entire country being locked down over the Easter weekend in three weeks’ time. This comes just ten days on from Italy blocking a shipment of 250,000 AstraZeneca vaccines bound for Australia. The EU continues to be criticised for the slow pace of its vaccine rollout.

As mentioned above, a calmer week in the US than has been the case of late finished with President Biden’s $1.9 trillion stimulus bill being signed into law. The bill sees direct payments of up to $1,400 to each American, amongst an assortment of other measures. The Dollar benefitted on Friday as a result (shown in the chart below), with the OECD doubling the 2021 US growth forecast to 6.5%, solely because of the stimulus package. They also stated the package could boost global economic growth by 1% during this year.

A quieter week for GBP-USD last week, ahead of central bank meetings on both sides this week.

The week ahead now and most of the focus is going to remain on the US. The warm-up act will be Tuesday’s retail sales for February which forecast a drop of 0.5%. This will give an early and overall look at consumer spending in the US. Future months are likely to hold more hope due to the stimulus plan.

Wednesday is the big one with the Federal Reserve meeting on Wednesday evening at 6pm UK time (an hour earlier than normal for those in the UK as the clocks went forward in the US over the weekend). Jerome Powell’s last statement to the press was that the rise in bond yields had “caught my attention”, but the question remains have they caught it enough for the Fed to act. Everything is very finely poised, so hints rather than bold calls may be more likely in the statement. Suggestions of interest rates remaining on hold for “some time” or a slight increase in their inflation estimates would acknowledge the current situation, without causing too much panic.

The following day sees the Bank of England meeting, with the benefit of being able to react to the action of the Fed the night before if needed. Look out for narrative regarding the recovery, the impact of vaccines and the “reopening plan” more than anything else. Will they remain upbeat, or suggest the path ahead is still uncertain? Words either way will drive sterling come Thursday afternoon. Equally the favourite topic of negative interest rates being locked away permanently (or not), could well cause movement.

So, what does this all mean? Despite a week last week where GBP moved by 0.6% & 1.5% against the Euro & Dollar respectively, this week should see a lot more movement. Sterling is likely to be vulnerable ahead of the Fed and Bank of England meetings, so there could well be opportunities in the first part of the week for Dollar sellers. As bond markets have calmed down a little, GBP-USD positivity might return the other side of these events, dependent on the language used in the statements.

Again, we remain in a very favourable position for Euro buyers, with the cross still within 1% of a 12-month high. All eyes on what action Powell and Bailey choose to take with their respective committees. That said, prices remain volatile and so risk management is the key, given the potential for volatility this week. We have a raft of measures available to protect you and your purchases, so please do get in touch with your point of contact to discuss in more detail how we can protect you from, rather than react to market movements.

To (tenuously) adapt a quote from a hero of mine, the late great Formula 1 commentator Murray Walker, who sadly passed away over the weekend aged 97, “Anything can happen in foreign exchange and it usually does”.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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