Wednesday will see the release of UK inflation data with forecasts expecting a slight decrease from last month’s figures. June’s Consumer Price Index (CPI) rose by 2.5%, which was an increase from the 2.1% in the previous month.
In the UK Sterling exchange rates experienced a quiet start to the week with GBP EUR trading in the mid 1.17 range at the open and close of business. GBP USD was a similar story with rates remaining stable around 1.3850.
Last Thursday, we saw Sterling saw an annual high of 1.1836 against the Euro, which is the highest trading level we have seen in 18 months. The pound continues to trade close to annual highs against a basket of currencies, including the Australian Dollar, New Zealand Dollar, and Singapore Dollar.
As mentioned in previous reports, the pound has benefited recently from the UK’s successful rollout of their Covid-19 vaccination program. High vaccination numbers have led to an easing of restrictions in the UK which has allowed the economy to open and boost economic activity. The increase in economic activity is highlighted by the sharp rise in UK inflation data and retail sales figures.
With no real gains or losses recorded for Sterling yesterday, many will look towards the release of key economic data today and tomorrow for an indication of where rates may move next. Employment change data released this morning showed that an increase of 95K jobs have been added in UK, which is an increase from last month’s reading of 25K.
Although an increase is positive for the UK and Sterling sentiment, the government’s Covid-19 Job Retention Scheme (Furlough) will be coming to an end in September, and this could lead to a sharp increase in unemployment as businesses in struggling industries are forced to make cuts.
Wednesday will see the release of UK inflation data with forecasts expecting a slight decrease from last month’s figures. June’s Consumer Price Index (CPI) rose by 2.5%, which was an increase from the 2.1% in the previous month.
The forecast for July is for a rise of 2.3%, which is still above the Bank of England’s key target level of 2%. The BoE continues to maintain the position that high inflation levels are to be expected in the short-term and have so far made no changes to their current monetary policy.
THE EUR GBP RECOVERY
EUR GBP rates recovered yesterday following new lows experienced during last week’s session. The euro has struggled to find support against the pound throughout much of the year with many countries in the bloc still experiencing high levels of Covid-19 infections and restrictions which limit the way in which businesses operate and therefore have a negative effect on economic activity.
As stated in earlier reports, the EU had a sluggish start to the vaccination rollout and this weakened support for the euro against the pound and the dollar. However, vaccination numbers are now higher than the UK in countries such as Malta, Portugal, and Spain. According to the European Centre for Disease Control, 73.6% of adults in the EU have had one dose of the vaccine with 63.2% having one jab.
The vaccination levels are positive for the EU and the eurozone economy, however, the European Central Bank (ECB) has taken a cautious tone towards monetary policy in recent months which has negatively affected euro rates as the bank has suggested an interest rate hike would not be seen for some years. Germany, the powerhouse of the bloc has seen inflation rise close to 4% with the overall reading for the EU at 0.9%. If inflation continues to rise in Germany and creeps up further in the bloc then the bank may be forced to reconsider its current stance.
Tomorrow, the latest release for core inflation data within the block will be released and is forecast to drop to 0.7%. Any major deviation from this has the potential to cause volatility so please get in touch if you have any upcoming exchange involving the euro.
GROWING SUPPORT FOR ‘TAPERING’ OF BOND PURCHASES
In the US there is reports of growing support for the tapering of bond purchases to be announced at the next Federal Reserve policy meeting. Fed Governor Christopher Waller and Fed bank Presidents Eric Rosengren, Robert Kaplan, and Jim Bullard have publicly called for a September taper.
The change in views on when to reduce the current bond-buying programme has followed the strong jobs data over the past two months.
August Non-farm payrolls data (measure of the change in the number of people employed during the month) came in at 943K, higher than the forecast 870K and an increase from 938K seen last month. Inflation rates more than 3% higher than the Fed’s target level of 2% have also fuelled support for the change in policy. The dollar could find support if a change in policy leads to a decrease in inflation with the Fed not currently planning on raising interest rates until 2023.
On Friday, USD/GBP rates fell following a lower-than-expected reading from the Michigan Consumer Sentiment release. The index measures how consumers view prospects for their own financial situation, and the general economy. The expectation was for a figure of 81.2 in line with the previous month but fell short at 70.2. Many cited fears over rising inflation levels and the lingering threat of the coronavirus delta variant. Economic activity could be affected if consumer confidence continues to fall in the US and this could in turn impact the dollar.
Retail sales figures will be released later today which is a key indicator on consumer behaviour and forecasts suggest there will be a decrease in sales from the previous month of 0.2%. Any major deviation from the forecast levels could move dollar exchange rates. Please reach out to us for an update on developments.
However, continued levels of high inflation will keep pressure on the Bank to a potential change in policy in the future.
If you have any upcoming exchanges, please get in touch with your account manager here who can keep you up to date with any rate fluctuations following these data releases.
This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).