Citibank, the world’s largest foreign exchange dealer has recently stated: “We continue to expect GBP to strengthen in coming months”. The bank went on to highlight the ever-growing inflationary pressures in the UK: “We continue to expect GBP to strengthen in coming months as upside inflation risks will prompt the Bank of England to signal policy normalisation,”. Policy normalisation refers to interest rates and monetary policy to pre-crisis levels. The quicker an economy can return to “normal levels” the bigger the advantage they will have over their peers and therefore the currency in question will benefit.
There are fears that inflation in the UK could remain above 2% for a long period of time, which could affect the outlook for policymakers. As has been mentioned in many reports, when inflation is high and above-predicted figures, this can put pressure on the Bank of England to revise the timing of interest rate levels, which in turn can affect the currency in question.
The Bank of England are currently viewed as one of the more positive central banks in the world, especially compared with the European Central Bank, Swiss National Bank and the Bank of Japan.
Governor Andrew Bailey of the Monetary Policy Committee revealed that half of the Committee believes the minimum conditions for an interest rate rise have already been met which highlights the appetite in the UK for a rate hike in the near future.
With the schools back, we are expecting to see rises in Covid-19 cases. Autumn is approaching and scientists are concerned a sizeable wave of cases is around the corner as we enter the winter months. The positive news is that the UK’s vaccination programme has been relatively successful compared with other developed countries. However, as history has shown when there is a spike in Covid cases, consumers tend to withdraw from spending. So, even if the government keeps the economy open, this does not mean the public will continue to spend if Covid cases rise exponentially.
Average earnings this morning came in slightly better than expected at 8.3% against a forecast of 8.2%. Tomorrow, the UK has Consumer Price Index figures out in the morning which is an important reflection of the economy and worth keeping an eye on. On Friday, we see UK Retail Sales figures which again is important data and worth tracking.
Eurostat GDP growth forecast was amended as 2.2% instead of 2% initially estimated by the European Central Bank who in turn have raised their forecasts for this year.
The ECB has announced lesser paces of quantitative easing for the final quarter of 2021. Holger Schmeiding, chief economist at Berenberg stated “Don’t dare to call it tapering. Even ahead of the US Fed, the European Central Bank announced today that it will pursue its emergency net asset purchases “at a moderately lower pace” in Q4 than in the last two quarters,”. This means the ECB has taken an opportunity to effectively reduce the pace its footprint in the European government bond market grows in size each week.
Last week saw German inflation figures rise to the largest levels we have seen in almost 30 years to 3.9%, which helped the Euro. There are large consumer price rises in wood and other building materials which has been a major factor “The main reasons for the sharp rise in steel and wood prices are likely to be the high demand at home and abroad as well as problems with the supply of raw materials. In the case of steel prices, there were also strong price increases for iron ore imports. These rose by 97% from June 2020 to June 2021 and have thus almost doubled”.
There is little economic data out this week in the Eurozone. On Friday, we see Eurozone Consumer Price Index figures released which is worth tracking.
Last week saw the Pound to US dollar dip below 1.3750, however, a rally for the Pound has meant the pair comfortably sit above 1.38. The dollar rose against most major counterparts in a turbulent week of trading for stock and commodity markets.
August’s non-farm payrolls report suggested it could be October before the Fed is satisfied the conditions are met while emphasis on labour markets mean this weeks U.S data might have only limited implications for the Dollar.
We have Consumer Price Index data later today in the US. Investors will be watching these figures closely ahead of the Federal Reserve’s next policy review Sept 21-22. The expectation is a rise of 0.3% in August from July, any major deviation from the predicted figures could affect the US dollars value.
The Wall Street Journal reported last Friday that Fed officials will seek an agreement to begin paring bond purchases in November. Chief fixed income portfolio manager at Nissay Asset Management has said: “If the Fed does start tapering in November, announcing it in September, that would be a bit earlier than many investors’ assumption and could hurt risk assets. The Fed’s September meeting could become a turning point for markets,”.
The U.S – China trade dispute has not found any resolution. Many investors will be keeping an eye on developments in China as a wave of relentless regulatory moves by Beijing has hit big tech firms.
Tomorrow, we have Crude Oil Inventories, and Thursday we have the important Retail Sales figures which has the potential to move the markets if the data deviates from predictions.
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