The pound has started this week’s trading session on the front foot, with almost all sterling pairings turning green across the board. GBP/USD gained almost half a percent throughout the day. The most positive gains came against the euro and the Swiss franc with GBP/EUR breaking above the 1.18 barrier at the time of writing.
As reported in a number of our recent market commentaries, sterling was subject to a market wide sell-off following the Bank of England’s decision to keep interest rates unchanged at their last monetary policy meeting. Expectation for a rate-hike before the end of the year remains high amongst many investors so we could see sterling rates rise once again in the lead up to the Bank’s December meeting.
Yesterday, governor of the Bank, Andrew Bailey, appeared in front of parliaments treasury select committee to testify on the latest monetary policy decision. He stated that last month’s decision to leave rates unchanged was a ‘very close call’ and that ‘the labour market looks tight, that’s the big issue’. Bailey and the other MPC members have not seen enough evidence to judge how far the end of the furlough scheme has impacted unemployment in the country. Bailey also added that the bank ‘are in the price stability business’ and stressed that the UK is not facing a return to the inflation and wage-price spirals of the 1970s.
Data released this morning shows the unemployment rate in the UK has fallen to 4.3% which is in-line with the expected reading of 4.4%. This is likely to provide further support to sterling’s recent recovery. The number of new people employed over the 3 months leading up to September increased once again by 247K. This data is promising for the UK; however, it covers a period of time before the furlough scheme ended. More positively, company payrolls rose by 160,000 in October despite the end of furlough and job vacancies rose to a record 1,172,000.
With the Bank insisting that all policy meetings are in play, could we see a rate hike looming before the end of the year? Any speculation suggesting so could provide significant opportunity for GBP/EUR buyers. If you have an upcoming exchange involving the pound, please keep in touch with your account manager here at Lumon who can keep you up to date with developments.
In Europe, the euro fell against a basket of its major counterparts including the dollar and the pound. EUR/USD fell to record new lows with the pairing now trading at the lowest level seen since July 2020. EUR/GBP sank to a 10-day low as Covid-19 cases are on the rise across the bloc.
Germany, the economic powerhouse of the eurozone is experiencing a spike in Covid-19 infections. The countries public health authorities reported a record new 303 new infections per 100,000 over one week. Amid the growing concern, outgoing Chancellor Angela Merkel has urged unvaccinated citizens to come forward for the jab. The three parties likely to form Germany’s next government (SPD, Greens and FDP) agreed over the weekend to toughen coronavirus restrictions in response to the rise in cases.
Unvaccinated citizens will likely have stricter restrictions placed on them, including requirement to show a negative test before travelling via bus or train. This echoes the restrictions that have just been placed in neighbouring Austria, who announced in simple terms a lockdown for the unvaccinated population.
Social restrictions could weigh heavy on the strength of single currency if economic activity decreases due to people being unable to go out and spend in the usual manner.
Yesterday, Deutsche bank chief executive Christian Sewing criticised the European Central Banks current stance on monetary policy and called for the bank to provide countermeasures against surging inflation. Inflation in Germany rose to a three-decade high last month of 4.6%, but the ECB remained unchanged in their approach dealing with this. The lack of expectation on the ECB to act will continue to provide negative sentiment for the euro and could help push rates further south for the currency.
In the US, dollar exchange rates climbed yesterday as the currency enjoyed gains against a basket of its major counterparts. Lingering concerns about global growth and rising inflation have benefited the greenback over recent months. Yesterday’s trading saw the dollar benefit further from safe-haven inflows.
No gains were more significant than for USD/EUR, which is the worlds most traded currency pair. USD/EUR rates climbed to 16-month highs following comments made by the ECB President Christine Legarde. Lagarde’s comments were not new but reiterated the stance that any tightening of monetary policy now would cause more harm than good to the European economy. Forecasters at Danske Bank predict the pairing could see 1.10/0.9090 over the next 12 months, a level not seen since May 2020.
The dollar continues to perform well despite the little coming from the Federal Reserve who remain unwilling to change their current monetary policy stance. However, Mohamed El-Erian, chief economic advisor at Allianz believes the Fed are losing credibility over the long-standing position that inflation is transitory. He believes the stance weakens the central banks forward guidance and undermined the governments economic agenda. Many senior US economic analysts like El-Erian are pushing for action by the bank. Any change in stance or suggestion that the Fed are considering a rate hike could provide further strength for the dollar.
Retail sales data is released this afternoon and is forecast to show an increase of 1.2%, up from the previous reading of 0.7%. A rise in this data can often support a rise in the inflation reading. Any deviation in the reading has the potential to cause volatility for the dollar.
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