Client Newsletter - 21-06-21
Market movements over the past 18 months have naturally been driven more by political happenings and infection statistics, than the usual monetary policy and market data. Last week began in very much the same fashion, as recent mumblings from cabinet ministers began to gather pace before a delay to lockdown easing was confirmed in England, with similar measures elsewhere in the UK. Arguably a lot of this movement was already priced in by markets, so whilst GBP did weaken it wasn’t as substantially as some had feared.
The second half of the week was much better for sterling versus the Euro. This in itself was predominantly due to the strengthening Dollar, with the Euro on the other side of the economic see-saw between these two power houses.
The G7 leaders meanwhile completed their summit in Cornwall. Major takeaways were a trade deal between the UK and Australia, as well as an agreement in substantially reducing carbon emissions across the planet. Ironically, Boris Johnson made the 250-mile journey to the event on board an Airbus A321….. Do as I say, not as I do?
Tuesday led to another busy day of releases, starting off with Reserve Bank of Australia’s monthly monetary policy meeting minutes. No major shocks here but if anything it sparked more interest in the July meeting as a time when we might find out more regarding the stance on quantitative easing. Concerns around wage growth are still a talking point, keeping inflation down, whilst for now the bank considered it “premature to consider ceasing” their bond buying programme.
Unemployment in the UK is now running at 4.7%, improving from 4.8% the previous month as the recovery continues. The number of those claiming benefits also saw a sharp drop, so perhaps it is unsurprising that we saw inflation (CPI) up to 2.1% come Wednesday. British consumers are now definitely back in spending mode. This will need to be monitored closely but with all the pent-up demand due to some sectors being virtually shut down, an increase in inflation was to be expected.
The rest of the week was almost entirely Dollar-dominated. There had been much anticipation about Wednesday evening’s Federal Reserve meeting and it didn’t disappoint. Whilst interest rates were held at 0.25%, the suggestion was that they would be planning to hike interest rates up to 0.6% by the end of 2023. This was much sooner than had been suggested back in March, mainly as a result of a faster pandemic recovery, vaccination progress and sharp increases in inflation.
This move drove the Dollar through Wednesday night and Thursday, following sharp sell-offs in commodity and equity markets. Friday saw further USD strength, after comments from Fed member James Bullard surrounding his expectation of an interest rate rise in late 2022. The combination of these led to the largest weekly gains for the Dollar all year, hitting its best levels against many majors in some time, including over two-month highs versus GBP and the Euro. The chart for the week can be seen below:
The final full trading week of June comes with a number of major events on the horizon. Christine Lagarde takes to the stage on Monday with a testimony in front of the European Parliament Economic and Monetary Affairs Committee. Recent speeches from the ECB have not been well received by markets, with their lack of direction on monetary policy and vaccination programmes the main concerns. More of the same could well hamper the Euro further early this week.
Jerome Powell has a similar situation on Tuesday in front of the House Select subcommittee. He will be discussing the emergency lending programmes the Federal Reserve are using to combat the COVID recovery, but the Q&A after is likely to lead to more questions surrounding the interest rate policy of the Fed. Language will be monitored closely but we could well see the Dollar gaining more ground this week as a result.
Wednesday sees PMI data releases from pretty much all corners of the globe in the manufacturing and financial services economic sectors. Releases from Australia, Japan, France, Germany, the EU (as a whole), the UK and the US will give strong indicators as to which countries continue to see strong growth in their recoveries. The EU and US figures are probably the main focal points for now.
For the UK, the main event of the week will be the Bank of England’s “super-Thursday”. Despite the easing of lockdown restrictions being delayed, there is a lot of focus on whether the Bank are beginning to soften their policy on the economic element of the recovery. We shouldn’t expect much in the way of drastic change, but more subtle messaging and the tone of their comments to be the main drivers. Will they follow the Federal Reserve in beginning to signal their intentions on future fiscal policy?
This week also sees the final MPC meeting of the Bank’s Chief Economist Andy Haldane. Never one to shy away from offering his thoughts, we could see him go out with a bang in terms of his policy suggestions. Haldane has been at the bank since 1989 and has served the last seven years as part of the Monetary Policy Committee, always one of the first to call for loosening monetary policy or hiking interest rates, even when in total disagreement with the other eight members of the panel. His concerns most recently have been surrounding inflationary pressures and how they could harm the UK economy longer term.
Overall, a tough week last week for those looking to buy USD, but with the change in stance from the Fed this could be the start of the recovery for the Dollar. So the wait and see approach may prove more costly than taking prompt action. If you have pending requirements to buy Dollars, we recommend getting in touch with the team to look at protecting yourself against downside risk.
For Euro buyers, last week proved a great opportunity but could we have further upside this week if the Bank of England meeting provides more answers than questions. Yes, but there are a number of “ifs” required for things to head the right way.
Commodity backed currencies are likely to suffer at the expense of the Dollar and other majors, so with any pending enquiries do reach out and we will be happy to come up with a plan.