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‘FREEDOM DAY’ DELAY

Sterling holders could have been forgiven for feeling a bit nervous around the events that have come to pass so far in June.

The combination of a G7 summit which brought post Brexit tensions back to the headlines and indeed the extension of restrictions to the economy could well have started to weigh on the value of the pound given how sensitive exchange rates have been to both factors in recent times. There did seem to be plenty to shake sterling’s strength and knock it off it’s lofty levels in and around the 1.16s against the euro and 1.41s against the US dollar, sitting at the top of both ranges available since the pandemic initially brought out.

For those with foreign currency requirements this show of faith in the pound could point to a number of trends. The first being that actually the markets may be paying closer attention to the battles faced by the UK’s counterparts, whether it be question marks around monetary policy, vaccination rollouts and the speed of recovery out of the ongoing crisis.

Indeed, it was interesting to see how steady the pound remained despite PM Johnson pushing back “Freedom Day” by a month. MPs are due to vote this afternoon on the matter but given the overwhelming support the Labour party is due to bring to the decision, the markets are not expecting much volatility here. Importantly, there does seem to be some slack being cut for the UK economy as it gradually tries to pull itself out of this crisis. This could suggest that as progress is made there might be more ground for the pound to take on the international stage.

On the flipside, you could argue that maybe sterling’s value has now found its natural pricing within a market with so much uncertainty that investors are now waiting for a tipping point, whether that be from the UK jobs market, inflation levels and the Bank of England’s subsequent reaction, the full lifting of restrictions and how quickly the repercussions of this are felt within the economy.

We have already seen the latter play out this week, after a drop in the UK’s unemployment rate to 4.7% lead to sterling briefly driving past the 1.41 mark against the dollar.

A pickup in the jobs market generally tends to result in a positive change in consumer spending which arguably has already been reflected in this morning’s releases from the UK, with the latest Producer Price Indexes and Consumer Price Indexes all impressively beating market expectations. It will be interesting to see if this filters through to Friday’s early morning retail sales figures and sets the pound onto new levels as the week comes to a close.

AIRBUS AGREEMENT TO SET THE SINGLE CURRENCY ONTO NEW LEVELS?

This morning’s speech from Vice president of the ECB Luis de Guindos could set the scene for euro exchange rates in the second half of this week. Optimism from the European Central Bank has remained relatively consistent throughout 2021, with president Lagarde most recently reiterating the “downward risks are less pronounced” the further the bloc moves away from the crisis.

This was followed by a fairly gentle nod to mixed inflation levels which suggested that actually the central bank might not be as quick to provide further monetary support as most had expected. It will be interesting to see if de Guinos shows the same reassurance that inflationary pressures will even out as the year goes on. Inconsistencies here could naturally draw volatility to euro exchange rates. It was worth noting that the single currency didn’t lose much ground during yesterday’s trading despite weaker than expected inflation levels in France and Italy, suggesting the market is also buying into the ECB’s long term outlook. Eyes turn to the Eurozone’s official CPI release on Thursday to see if the Euro shows the same level of resilience if Tuesday’s figures have filtered through.

Something that might draw support to the single currency is the news that the bloc has finally reached an agreement with the US to solve the Airbus-Boeing trade tariff dispute. The aeronautic industry, which accounted for an estimated 178 billion euros in turnover in 2019, still stands as one of the leading sectors for the EU despite being one of the biggest victims of the Covid crisis.

News of an agreement to settle a dispute that has been ongoing for over 17 years might provide the kind of stability the industry needs to be able to kick on once more, which in turn could see the euro higher in the long run.

Katherine Tai, a US trade representative, will be traveling between Belgium and the UK today to try and find common ground. The parameters around a resolution will be key to the likelihood of an immediate impact on euro exchange rates, those looking to buy the single currency in the short term might want to follow the story in the days and weeks ahead.

CAN WE EXPECT A CHANGE IN STANCE FROM THE FEDERAL RESERVE?

Building on from the breakthrough on Boeing-Airbus talks, US president Biden has made clear his plans to rebuild bridges with his European counterparts at yesterday’s summit at NATO. This marked a clear turnaround in intentions from the previous US government which mostly overlooked it’s relationship with EU leaders.

Over the years this has arguably weighed on global risk appetite as trade tariffs continued to be raised on both sides of the Atlantic. This was clearly something that favoured the greenback given it’s safe haven status on the international stage.

It will be interesting then to see if Biden’s push for fresh agreements will lead to the US dollar weakening as the global outlook improves? This would certainly help the US economy overcome inflation concerns as a weaker dollar might favour exports and thus bolster economic activity.

This has been a main focus for the Federal Reserve even before the pandemic initially broke out and may well lead to a different kind of monetary policy stance to the one have been used to over the last 12 months or so.

As a result, this afternoon’s Interest rate decision from the Federal Reserve could hold even more weight with the markets given the circumstances. We did see a surprising contraction in overall Retail sales yesterday which ultimately reflects the concerns mentioned above.

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).