Samuel Mills
November 22, 2021

GBP EUR Continues to 21-Month High Amid Interest Rate Uncertainty

Sterling continues to recoup its losses against most G10 currencies recently with GBP/EUR looking to sustain 1.19 as a resistance point over the last few days. Whilst gains were not made against the USD, also referred to as the greenback, it has at least temporarily halted the downward spiral that the currency pair has seen since October.

Last week’s UK unemployment levels dropping to 4.3% and a 10-year high inflation level of 4.2%, twice what the Bank of England were targeting this year, had prompted this recovery for the pound. Potentially continuing this trend, Markit Services PMI expecting to hold similar to prior readings of 59 on Tuesday, a marginal increase on their European counterparts. With anything above 50 representing growth, this should be well received for both parties.

In COVID-related news, just like last year, as we head into the winter months and become more crowded indoors, coronavirus cases also tend to accelerate. However, the government’s efficiency in getting citizens vaccinated to 50 million first jabs, 46 million second jabs and 15 million additional boosters has helped keep the 7-day daily COVID-19 cases at 40k – relatively unchanged in other words. This should prevent the possibility of a UK lockdown which will be good for investors looking to invest into a confident pound and ultimately keep the currency strength moving in an upward trajectory.

Inflation and interest rates continue to be a hot topic both in the UK and globally. General consensus seems to be that hiking rates will be a case of “when not if” and with the rising cost of living affecting everything from fuel prices to energy costs, the central bank will try to encourage saving through raising the interest level initially from 0.1% to 0.25%. It is just the timing that the markets are unsure of. The previous decision left the markets very disappointed and will likely mean a cautious and bearish attitude moving towards the December announcement. Unfortunately, changing interest rates has not happened on a December announcement in the last 10 years so eyes are more focused on 2022 for a decision.

Head of the Bank of England, Andrew Bailey, mentioned last week about his “unease” of the rising costs of living but hinted that the full extent of the ending of the furlough scheme last month had not been fully evaluated. But with inflation set to rise to 5% next year, near-term action may need to be taken.

COVID-Induced Lockdowns Further Weaken Fragile Euro

The euro continues to weaken this week against both the pound and the US dollar. COVID uncertainty is partly to blame as the Netherlands entered a 3-week partial lockdown last week with a curfew in restaurants and sports events whilst Austria has had protests too but also stated that all citizens must be mandatorily vaccinated by February 2022 as a legal requirement.

The single-currency will not receive much support from market data either as Tuesday sees German and overall eurozone manufacturing PMI remain unchanged around 57 and 53 respectively. Both of these are lower than UK predictions but rangebound figures typically represent uneventful market movement.

In other news, last week saw the Bloc achieving its anticipated 2.2% GDP figure with the largest growth occurring in Austria at 3.3%. Could the recent lockdown severely dampen economic output for the next quarter in Austria? Additionally, whilst UK unemployment is reducing, Eurostat show that EU figures worsened by 0.9% last quarter and expected to rise 2% year-on-year from 2020. In comparison, a poll by Reuters suggests it was 0.8% last quarter and predicted 1.6% YoY but still signals to the difficulty Europe could face next year with stagflation and the debt crisis in member states such as Greece.

Mounting Strength for US Dollar Backed by Positive Policy Stance

USD/EUR, most commonly viewed as EUR/USD is still continuing its multi-month high with interbank exchange rates between 1.12-1.13 having collapsed from 1.23 back in January of this year. GBP/USD follows a similar yet delayed pattern as the 1.43 mid-price in June has now fallen to 1.34-1.35 at time of writing.

Just like the two prior sections, it will be busy on the data release front. Similarly for the world’s largest economy, Wednesday will be the key day this week for market volatility through a basket of mixed economic data releases. FX Street shows durable goods orders expecting a solid improvement from a 0.3% contraction to 0.2% growth, non-defence capital goods orders to drop slightly to 0.6% and finally US GDP at 1:30PM GMT. This always has the ability to influence both US dollar strength alongside multiple currency pairings which are directly or indirectly pegged to it. The response may be subdued though as the previous 2% recording could be revised to 2.1% but still a bullish announcement if figures come in as expected. This will then be finally succeeded by the FOMC meeting minutes which provide insight on monetary policy stance and how the US economy should shape up next year.

The US Federal Reserve (Fed) stance of quantitative easing will continue to help the US dollar gain strength. With its $120bn monthly bond-buying process being reduced $15bn a month until, all being well, it is at nil in summer 2022. This is considered positive and a benefactor to USD as the economy does not have to be kept afloat by the regular investment by the treasury as it has now found more stability. With the balance sheet in gradual reduction, like many countries are starting to do globally, this could help the dollar continue its inroads against many of its common currency counterparts.

However according to the Financial Times, head of the Fed Jerome Powell has indicated that interest rate hikes, albeit potentially multiple, are unlikely to happen before summer next year. With the UK gearing up for its in the near-term, all eyes should be on the Bank of England should you be in the market to trade GBP/USD.

Please reach out to your account manager here at Lumon should you wish to further understand how the ongoing central banks activity could affect your trading position!

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