Client Newsletter - 31-08-21

As mentioned recently by my colleague Liam Alexander, GBP-EUR has been “drifting” along of late and that trend continued last week. With a distinct lack of UK data releases/market events to drive prices, GBP moved within a range of just over a half a per cent against the Euro all week, demonstrating just how quiet things were.

In terms of actual market data, Monday was the main day of the week with a raft of PMI releases for July. The first were Australian figures which showed a very small amount of growth for the manufacturing sector and a sizeable contraction in the services sector. Sadly, this is likely to be a sign of things to come with continued lockdowns and rising delta variant cases.

Meanwhile, New Zealand continued its own lockdown restrictions for a further two weeks, kicking the can considerably further down the road for their long-awaited interest rate rises. The search for yield globally continues…

French and German data releases followed, with manufacturing and services in France meeting expectation. German figures were mixed however, and unsurprisingly the manufacturing sector still hasn’t rebounded quite as much as hoped. This is likely to still be linked to the shortage of semiconductor chips globally, such is the country’s dependence on the automotive industry.

Overall manufacturing for the Eurozone was still slightly behind what had been hoped, probably for the reasons mentioned above. Price movements on GBP-EUR (or the lack of them) can be seen in the chart below:

PMI figures for the UK continue to show good growth, especially with the boost from the final easing of restrictions in July. Manufacturing and services sectors showed expansion, albeit the services sector slowing down slightly when compared to the last few months. The same can be said of the equivalent US figures also.

The minutes of the most recent July ECB meeting were released on Thursday, demonstrating the latest central bank to raise concerns about inflation. Having managed to reach its 2% target recently, matters have now turned to an expectation to overshoot that figure over the coming months. Forward guidance on interest rates is now being linked to inflation figures also, so expectation will now switch to the September ECB meeting for further changes on its PEPP (Pandemic Emergency Purchase Programme).

That led us on to the much-awaited Jackson Hole Symposium, specifically the speech of Jerome Powell on Friday afternoon. The Fed chairman’s speech had been hoped by many to finally provide a start to their tapering and outline a path out of the pandemic for the US economy. Despite many hawkish members of the Fed wanting to taper, the wait goes on and eyes now shift to the next meeting in mid-September for further clues. The Dollar weakened off as result as shown in the chart below, the simple fact being more Dollars being printed still through the bond buying scheme equates to a weaker currency.

I read an article on Friday afternoon which broke Powell’s speech down as “The Good, The Bad and the Ugly” which for me summarises it well:

• The Good – The jobs market in the US is continuing to perform well and expectations are for this to continue.
• The Bad – Inflation is still a concern, but the Fed expects it to cool later on but has the means to respond. Powell expects it to “wash over time”.
• The Ugly – The Delta variant is still creating a large amount of uncertainty on the economic picture over the coming months.

For those looking to buy Dollars over the coming months, Friday afternoon’s speech nudged GBP-USD to its best levels for about ten days, so this is probably a good buying opportunity for now on spot or forward trades (depending on your timeframe). Those selling Dollars, just be wary that if the tapering delay continues, this could prompt further Dollar weakness back to some of the higher levels seen back in May. Either way, reach out to the team and we can discuss the best approach.

So, to the week ahead and a slightly shorter week for those of us in the UK after the Summer Bank Holiday. I am pretty sure we aren’t meant to have to put the heating on during a “summer” bank holiday but that is a separate matter!

Tuesday brings us the initial flash estimate of consumer price inflation for the Eurozone, year on year. As inflation continues to rise globally post-pandemic, the Eurozone is starting to see inflation rising also and expectations are of a 2.7% increase compared to a year ago.

The start of a new month on Wednesday (how did it get to September) brings the usual raft of manufacturing sector PMI figures. As always, above 50 shows growth and below shows contraction. Most corners of the Eurozone are still recovering strongly with figures of 60 plus, apart from France and Spain who are just under that figure. The UK and US follow later, again with expectations just over 60. These are early indicators of any slowdown in the respective economies.

The same set of figures emerge for the Services sector on Friday morning where most numbers are likely to be below 60. Eurozone Retail Sales are also released on Friday morning, expected to remain flat compared to the previous month. Consumer spending has slowed down a little recently in the bloc, but it will be interesting to see how well the retail sales and inflation figures correspond to one another this week.

Then the main event of the week on Friday afternoon, the non-farm payrolls data from the US. US jobs data has really been showing signs of growth in recent months, perhaps adding to the surprise that we haven’t seen tapering already from Powell & co. But this is still only one of the metrics in use by the Fed, alongside inflation. Despite the large figure last month, expectations are lower this month. If we do see a surprise with close to a million jobs added, expect some considerable Dollar strength and tapering could be back on the table again as soon as the September meeting. On the other hand, closer to 500k and low wage growth could really push back taper talk, and the USD could fall much further.

As a result. it is quite a big week for those trading Euros and Dollars. The week’s figures could have far-reaching consequences. If you have anything you wish to discuss, reach out to the team and we will happily assist.

Stay safe and well.