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ACM Update Monday 1st March 2021

The last trading week in February saw further gains for GBP, hitting fresh highs versus the Euro and Dollar. But it certainly wasn’t all one-way traffic. For only the fourth time since mid-September, Cable closed the week lower than it opened. Is sterling’s recent run hitting the brakes or are we just taking a breath of fresh spring air before another positive run……

HSBC called GBP-USD "overstretched" mid-week. 

I can’t recall a period of having to write the phrase “sterling hit fresh highs this week”, so many times week after week but here we are. Alas, sterling did indeed hit fresh highs again, for most of the week looking like it was going to march into March at pace. Tuesday evening saw Jerome Powell (Chair of the Federal Reserve) providing his biannual testimony to the senate, where the major takeaway phrase was that the “economic recovery remains uneven and far from complete, and the path ahead is highly uncertain”.

His speech helped GBP to a fresh peak overnight, taking it over 12% gained in the last five months versus the Dollar. The pandemic is still definitely still the main driver of currency markets at the minute, with Powell’s honest appraisal not what many wanted to hear. The chart below shows the big picture since September, with the peak over 1.42 last week:

GBP-USD movements over the last five months. But has the trend come to an end?

But as mentioned, it wasn’t all plain sailing for GBP-USD this week. Come Friday morning we were 2.5% back the other way, after Andrew Bailey (Bank of England Governor) had an article published in the UK press, stating the Bank were expecting a negative Q1. Again, I don’t think this came as too much of a surprise to anyone, but GBP suffered as a result. That combined with a rise in US bond yields led to a big focus back on controlling inflation for central banks.

Jerome Powell had already commented on Tuesday that the Fed are open to seeing inflation run “slightly” above the two per cent target for a “period of time”. Meanwhile on Friday, the Bank of England’s Chief Economist, Andy Haldane, weighed in with his own thoughts. He felt that an inflationary “tiger” had been awoken, which other than being an interesting expression, highlights how both sides of the Atlantic are monitoring the topic.

As vaccines are rolled out, all the pent-up consumer demand could lead to inflationary pressures, “requiring policy makers to act more assertively than is currently priced into financial markets”, he continued. Central banks are now looking more at recovery from the pandemic, rather than at rescue.

Sterling-Euro followed a very similar path to that of GBP-USD, having hit its own 12-month high overnight on Tuesday/Wednesday. Almost eight per cent in two months is a huge movement under any circumstances, let alone in the middle of a pandemic. For most of the reasons highlighted above, prices came down by a similar figure to the Dollar, but broadly speaking it was a quieter week in Euroland. Monday’s conference from Boris Johnson regarding the proposed plan to reopen the UK caused little to no excitement for the pair. The chart below shows GBP-EUR’s movements last week:

Over 12-month highs for GBP against the Euro last week, but it soon fell back.

Other major movers for the week included the Australian Dollar, which took a hit on Friday afternoon. The rise in US bond yields did substantial damage, before the RBA (Reserve Bank of Australia), pulled a surprise move by buying AUD 3bn worth of 3-year Australian government bonds. The move saw the Aussie Dollar drop off sharply in Friday’s trade.

As we go into the week ahead, it will be interesting to see how markets react to the House of Representatives passing President Biden’s $1.9 trillion stimulus bill over the weekend. Could we see another rollercoaster of a day on Monday for the Dollar. It looks quite likely.

Being the first week of a new month, we see a raft of manufacturing PMI data released on Monday morning for some of the major players in the Eurozone as well as the UK, with Canada and the US following suit in the afternoon. These will give a strong indication about what to expect for other major economic indicators over the next couple of weeks, thus markets will be watching closely.

Tuesday morning (GMT) sees the rate statement from the Reserve Bank of Australia. Having already gone on record to say they don’t expect to be raising interest rates until 2023, logic would dictate this to be a non-event. But after last week’s surprise announcement about government bonds, we could see more focus on this any rhetoric flowing through from the statement. GDP follows a day later, providing more clues to the upcoming strength of the AUD.

A big day in the UK on Wednesday with Budget day. Rishi Sunak’s scheme to help high street shops has already been unveiled, with £5bn pledged to help them re-open as restrictions are eased in England. The Chancellor continues to reaffirm that his priority is still jobs and firms, stating that this is one of a range of support measures to get businesses and the economy back on their feet. All this as UK public sector net debt hits £2.1 trillion. Vaccinations continue at pace across England, with now over 20m people having received the first jab.

Last but certainly not least, Friday sees the US Non-Farm jobs data. We have fallen short of expectation regularly over the last few months here, but last month’s miss led to hope of more stimulus from the new President. Will we find ourselves in a similar situation again come Friday afternoon?

All in all, for sterling sellers at the moment prices are still fantastically strong despite the blip at the end of last week. HSBC called GBP-USD “overstretched” in the middle of last week and it turned out they were right, very quickly. We could well see a little more of that over the coming days, but the stimulus package, UK budget and non-farm data might change the picture dramatically. As I said a few weeks ago, a bird in the hand.....

Things can change rapidly in the current market. Ten days ago, a regular dollar-buying client of mine emailed me saying “hello old friend”, having not seen his friend 1.40 for about three years! Sadly, that same friend didn’t hang around for too long, but looking at the trend and the big picture, he could well be seeing him again soon.

But don’t forget the percentages I mentioned earlier. 12% improvement in five months on the Dollar. Nearly 8% movement in two months on the Euro. These are big figures, so if you have exposure over the coming months then it is worth having a conversation with us about taking advantage of current prices. This also removes your risk should any reversal happen.

It should be another busy week. Stay safe.

written by

David Comber

David Comber is a Senior FX Trader at Aston Currency Management

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