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ACM Update Tuesday 5th January 2021

Well, the 2021 positivity lasted 4 days. A third national lockdown it is – the gift that keeps on giving. Q1 is going to be a bumpy ride for markets, buckle up!

The beginning of Brexit, the final (hopefully) fight with Coronavirus and the handing over of the keys in the White House. It all makes for an interesting kick off to the year. UK monetary and fiscal policy will take on increased significance this year for the direction of Sterling. Plotting a course to recovery for the economy is going to be no mean feat for the Chancellor. A £4.6bn package of measures is being readied to support businesses through to spring. From a monetary perspective, will UK interest rates go negative this year? We have the Bank of England Governor, Andrew Bailey, speaking tomorrow. We will start to get a better handle on things in the coming days before the MPC meeting on 4th Feb.

Where is Sterling likely to trade in Q1 this year? You can view the movements on Cable (GBP/USD) and GBP/EUR over the past week in the graphs below –

 

Sterling/Dollar

As you can see Sterling/Dollar has been battling to hold above 1.36. We are settling around the mid-1.35 level this morning with Sterling taking a hit after the recent lockdown announcement. Where now for GBP/USD? If you can achieve above 1.35 I would look to take advantage of where we currently are and cover off some of your exposure. Your downside risk slightly outweighs your upside potential at present. Please get in touch with a member of the trading team and they can take you through technical levels and discuss your specific requirements in detail. Managing your FX exposure in Q1 this year will give you a solid foundation to work from for the remainder of 2021.

On the Dollar side we await the Georgia election result that will determine whom controls the Senate. It is finely balanced although a democrat win would give the president elect Joe Biden the opportunity to really put his stamp on things for the next four years.  We also have the ISM Manufacturing PMI (Dec) released this afternoon with a print of 56.6 expected. This gives us an overall view of the manufacturing sector. Tomorrow we have the FOMC minutes released and I don’t expect much reversal in terms of stimulus to combat the pandemic and I’d expect, like the majority of central banks globally, to keep interest rates near zero this year. Rounding off things from a US perspective this week is the release of the NFP (Non-Farm payroll) figure on Friday with a print of 100K expected.  I expect Sterling/Dollar to keep above 1.30 in Q1 with the potential for further upside in Q2 with Sterling bouncing back stronger than perhaps expected. This of course will largely be down to the successful rollout of the vaccine enabling a return to work and thus productivity and growth.

Sterling/Euro

From a Sterling/Euro perspective we have given up some recent gains and settled back into the 1.10’s. I expect GBP/EUR to push higher in upcoming trade with EUR/USD looking heavy at 1.22/1.23. If you have a requirement to purchase EUR please get in touch with a member of the Aston trading team. It may be prudent to implement some take profit orders to the upside to capture any short-term gains. I expect the UK to be ahead of Europe in the rollout of the vaccine and that should provide Sterling with the impetus to push higher this year against the single currency. The mechanics of post Brexit rules are slowly being worked out and there is going to be a lot of adjustment taking place over the coming months. Indeed, it may well take the entire year to fully get to grips with the new reality and relationship. However, as stated above, I expect the UK to bounce back strongly in Q2 and into Q3. We had the release of UK Manufacturing PMI (Dec) this morning with a better than expected print of 57.5. From a European perspective this week we have the release of Retail Sales (YoY) (Nov) and inflation data in the form of Preliminary CPI (YoY) (Dec). Of course, post Brexit headlines will also dominate and help shape the direction for GBP/EUR this year. If you have a requirement to sell EUR/GBP take advantage of the current SPOT price and lock in the move in your favour.

We all hope to be free from the shackles of the pandemic by spring and get back to ‘normality’. The Aston team wishes you the best for 2021 and we look forward to seeing people in person again.

In the interim, we look forward to assisting you with your FX requirements and if there are any questions feel free to reach out to me directly or a member of the trading team.

Stay safe out there

written by

Liam Alexander

Liam Alexander is the CCO at Aston Currency Management.

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