Sterling regained some of its lost ground against some of the most commonly traded currencies such as the euro and US dollar yesterday. This was surprising considering that Wednesday saw the pound fall heavily against almost all G10 currencies. This was down to the very surprising result of the UK GDP release yesterday morning. Whilst GDP Q1’s 4.8% gain was predicted to collapse to -1.5% in Q2, the release came in at a very bullish 5.5%. This disrupted the markets who were looking to continue selling off the pound and buying into more stable currencies.
The pound remains shaky though with the 01 October marking the first day without the furlough scheme since its initial inception back in March last year. With this, there are an estimated 1 million people in limbo working for companies who will have to make the tough decision to retain their staff or to start redundancies from positions that no longer exist in the progressively post COVID-19 economic climate. With inevitable unemployment expected to rise, this could cause weaknesses for the fragile pound. The UK population will further see the pinch in their bank accounts as well with UK inflation expecting to rise to 4% this year increasing the cost of living from the price of fuel gaining a few pence already, to rising food and energy prices. In extension, UK energy regulator Ofgem has stated that the rising gas prices are causing many energy providers such as Enstroga, Igloo Energy and Symbio Energy to go under. Even the 6th largest provider Bulb is potentially going into administration whilst also in talks with Octopus Energy for a buyout.
In other news, the hot inflation drive has meant that the Bank of England (BoE) have revised their forecasts for an interest rate hike. Albeit for the negative reasons of rapidly increased consumable prices, the central bank is estimated to have an added 0.5% chance of hiking rates by June instead of August 2022. Since this is a factor describing a recovering, growing economy, this bodes well for the Sterling to rise as it has done for most of this year against the likes of the euro.
Looking at events on a macro scale, there are undeniably some obstacles the UK will have to face but the key headlines seem to be the main market drivers lately. There are few countries globally that are painting a more positive picture financially than the UK based on interest rates and overall GDP forecasts.
With GBP/EUR rates dropping to 1.16 on Wednesday, the euro conceded a cent to the pound yesterday following its GDP release. It’s even worse for EUR/USD rates which have collapsed almost 2 cents in the last 2 days moving from 1.18 to 1.16. This represents a fantastic trading opportunity on the pairing as euro buyers will not have seen better levels since July 2020.
Going back into monetary policy again, the eurozone is also expecting some positive economic recovery as we move through the end of 2021 into 2022. Inflation levels are also rising just like in the UK and whilst not to such an extent, that is not necessarily a bad thing. Whilst inflation is needed to grow continuously in developed countries as wages are expected to rise with the cost of living, seeing too sharp a rise in inflation can lead to negative social factors such as increased homelessness as the economy needs time to recover gradually. This puts the European Central Bank (ECB) in a more comfortable position with monetary policy and tapering quantitative easing.
Regarding economic data, today sees German retail sales figures get a much-needed boost from -0.3% to 1.9% whilst Eurozone CPI is expecting a small improvement to 3%. Whilst it’s unlikely these will contribute much to market movements; continuous signs of economic recovery will usually lead to long-term growth for the currency in question.
Kicking off with market data in the world’s largest economy, the US will not receive much end-week movement with just manufacturing PMI expecting to remain rangebound around a positive 60. Next Friday will be more eventful with the volatility-inducing non-farm payrolls which can always bring significant swings depending on the nature of the release. Indications of this release will come in the form of the ADP employment change on Wednesday which suggests an encouraging 100,000 new jobs to the US market.
This should set the tone for more US dollar gains moving into next week as the most globally traded currency takes advantage of the global supply issues we are seeing at the moment. As mentioned in yesterday’s report, this stems from the save-haven status of the dollar causing investors to buy into it in times of uncertainty.
The Federal Reserve’s CEO James Bullard has some very bullish plans for the US economy as well which could act as a key driver for USD rates long-term. He has stated that 2 interest rate hikes are likely planned for next year due to the inflation and financial growth the economy has seen this year. Calls to begin declining the US balance sheet are already in motion as the bonds and securities the Fed bought into to keep US investment healthy will start to be sold off. Whilst also referred to as reducing quantitative easing, this results from the economy having found its feet and no longer needs continuous investment to keep it stable.
With very good trading opportunities selling the dollar, feel free to contact your account manager here at Lumon so we can explain why your inability to drive anywhere because you have no fuel is actually saving you money in exchange rates!
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).