Client Newsletter - 25-01-21

Written by: David Comber
Date posted: 25.01.21

A lot of the press and talk last week was naturally about matters in the US, with Joseph R. Biden officially becoming the 46th President of the United States at midday on Wednesday. Despite concerns surrounding security after the storming of the Capitol building fourteen days before, the event thankfully went smoothly, but without crowds due to COVID restrictions. The event was full of famous faces, both on and off the stage but a well wrapped up Bernie Sanders seemed to get a good chunk of the media attention. The Senator is using the publicity to sell sweatshirts for a food charity back in Vermont, good on him!

Several clients reached out this week to ask if Biden’s inauguration would have an immediate impact on the dollar, and if so, what would be the direction of travel? Given the election process in the US, we have known since November that Biden would be in power, so little movement was expected from the inauguration itself. As with any political or data-related movements, it will take some sort of a “major surprise” from Biden in his first few weeks in power to have a direct impact on the Dollar. Will changes need to be made to his proposed stimulus package? That seems the most likely candidate to cause unforeseen Dollar movement.

Back in the UK, sterling continued its gradual positive trend against both the Euro and USD, reaching fresh highs versus both. GBP is enjoying a bumper start to 2020 now that the Brexit trade deal (or more the threat of a no deal) is no longer weighing heavily. Bank of England Governor Andrew Bailey all but ruling out negative interest rates was also a massive help, compounded by further vaccine rollout progress in the UK. With the UK having given more jabs than the whole of the Eurozone combined as of the start of last week, this helped the current trend.

Better than expected inflation data pushed GBP-EUR to the best prices since May 2020 with a brief foray into the 1.13’s for a couple of hours. With movements such as what we saw last week, it is hugely important that your account manager is aware of any upcoming requirements you may have, so we can contact you at the right time. Predicting exact movements in the FX markets is a challenge, but if we are aware we can be reactive and reach out if prices do go the right way for you.

General consensus at the moment is for GBP-EUR to continue moving positively, so both Euro buyers and sellers should consider this week a good time to get in touch with the team to discuss ways to take advantage/protect against risk respectively. Recent movements can be seen below:

As mentioned, Cable (GBP-USD) is heading in the same positive direction with highs dating back to the first half of 2018 seen last week. The pair has moved in the favour of GBP by over 8% in four months, which is enough to make a big difference to profits or cause losses, dependent on which side of the trade you are on. If you have a dollar exposure, please give the team a call and we can look at the best approach for you. Are we heading to 1.40? Difficult to say at present but a saving of 8% in three months (especially in this day and age) shouldn’t be ignored. Recent movements are illustrated in the chart below.

To the week ahead now and as with last week a lot of the focus is going to be on the US, along with the first “digital Davos” World Economic Forum running all week. As since its inception in 1971, the event is a who’s who of world leaders making their own special addresses, but this time all taking place remotely due to COVID-19. With keynote speeches from Xi Jinping, Cyril Ramaphosa, Ursula von der Leyen, Angela Merkel and Emmanuel Macron taking place in the first two days alone, expect markets to be watching closely all week.

West of the Atlantic, the big action is on Wednesday evening (UK time) with the Federal Reserve interest rate announcement and subsequent press conference, the latter being the bigger focus. With interest rates globally likely to remain on hold for some time, the focus will be on Jerome Powell’s words for any clues towards future fiscal policy & stimulus. This is followed by US GDP on Thursday, which should stabilise after a few months of major plusses and minuses.

Tuesday is the main day for UK data this week, with unemployment & claimant count figures first thing. Unemployment came in better than expectation last month, but it will be interesting to see if further restrictions and lockdowns towards the end of December had an impact or not on the overall picture. Similarly, it will be interesting to see the Australian inflation data released on Wednesday, the day after the bank holiday there for Australia Day.

So all in all still a very challenging picture out there but despite the current lockdowns we are here to assist you (or anyone else you may know) with your foreign exchange needs. Please make sure to reach out to ensure we are up to speed on your requirements.

Stay safe and keep an eye out for the above event