JONATHAN WATSON
August 18, 2021

INFLATION DATA FAILS TO PUT PRESSURE ON BANK OF ENGLAND

The pound is trading in familiar ranges in August against most currencies having risen early on following this news but appearing to have plateaued and peaked last week.

The story of the pound this week so far seems to be muted responses to economic data, with the latest Inflation data not necessarily paving the way for future policy changes by the Bank of England.

This morning, the latest CPI (Consumer Price Index) data has been released highlighting a fall from 2.3% to 2%, which was unexpected and will take some pressure off the Bank of England to be more seriously considering interest rate hikes ahead.

The pound has been stronger in recent weeks since the last BoE meeting on the 5th August where it was suggested that as the UK economy begins to pick up steam ahead, interest rates could rise and this had helped sterling to rise.

The pound is trading in familiar ranges in August against most currencies having risen early on following this news but appearing to have plateaued and peaked last week.

Sterling of to slow start for June, 0.4% lower against EUR and USD.

The waning support for the pound evident towards the end of last week and this week was confirmed yesterday when despite some upbeat UK Unemployment data suggested a fall from 4.85% to 4.7% on the Unemployment rates, sterling actually ended the day lower against many currencies.

One cause for concern remains, COVID, and, despite case numbers dropping for much of July, there are some analysts concerned over the latest gradual pick up in case numbers. On 2nd August there were 21,500 new cases whilst yesterday there were 27,500, representing a trend higher.

Considering we are in peak holiday season, there could be worries that once the schools go back and the social networks this supports become live again, we could see another rise in cases which might as usual not be supportive for the pound.

The strength of the US dollar is another factor for sterling not continuing the ascent of earlier this month, whereas the world’s global reserve currency, USD strength has dragged GBPUSD down, pulling the pound lower against other currencies.

The reason for this is a less buoyant global economic political outlook, as fears over the global economic recovery were ignited this week. Economic data from China showed a slide in Industrial Production and Retail Sales, with the uncertain political outlook over Afghanistan also casting a shadow over market confidence.

The pound is continuing to trade near the highs of 2021 against many currencies including the Euro in the 1.17s, the Australian dollar at 1.89, and the New Zealand dollar hitting 2 recently. So, to learn more regarding the latest news and forecasts ahead for the pound, please contact our trading team.

EURO REMAINS WEAKER BUT RECOVERS GROUND AS IT EXITS RECESSION  

The Euro has continued to remain on the weaker side against both the pound and US dollar, trading near some of the lower ranges it has been trading at in 2021. One Euro will this morning buy 85 pence (1.1723 on GBPEUR) at the EURGBP interbank rate, which is down from the 90 pence the Euro enjoyed against the pound at the turn of 2021.

There was some good news for the Eurozone yesterday however as the latest GDP (Gross Domestic Product) data suggested that the single currency bloc had emerged from the recession with a 2% period of economic growth for the 2nd quarter of this year.

Despite this welcome news, there is still widespread concern over the economic performance ahead, particularly for some of the southern economies like Greece which are heavily reliant on the tourism sector which has remains subdued in the wake of COVID.

In more positive news, the Unemployment Change for Q2 reflected a greater rise than expected, further explaining and supporting the underlying improvements in the Eurozone economy.

Much of the focus regarding the Euro will be on the next policy actions from the ECB (European Central Bank) with markets debating the likelihood or not of a scaling back of the monetary support and stimulus used since the onset of COVID.

The ECB has committed to €2.2 trillion of bonds until March 2022 forming part of the PEPP or Pandemic Emergency Purchase Program, to help support the Eurozone economy. Whilst any potential signs of scaling this back might see the Euro strengthen, the previous comments that the ECB remains ‘accommodative’ on this topic may continue to see the Euro kept on the weaker side.

For more information on which way the Euro is headed, and the latest forecasts ahead, please do speak to our trading team to discuss further and in more detail.

We have a number of options to help limit your exposure to a weaker Euro ahead or to target trades for any improvements in the value of the Euro too.

Where next for the US Dollar

US DOLLAR DISPLAYS SAFE HAVEN STATUS ON BOTH ECONOMIC AND POLITICAL EVENTS

The US dollar has been stronger against most currencies fueled by many events, including poor economic data in the United States. The US consumer is one of the key ingredients to a healthy and buoyant stateside economy, and recent consumer sentiment surveys showed confidence at a decade low, whilst Retail sales for July were down 1.1%.

Typically, poor economic data will weaken the currency concerned but this is where the US dollar stands apart from its peers. As a safe-haven currency, the US dollar will often rise and fall in line with global risk sentiment, or investors and markets overall feelings on the global economic (and political) outlook.

After months of optimism that the US and the world were shaking off the worst of the pandemic, we had a few months back expected now to be a much more positive time in the global economy with fresh signs of the predicted ‘COVID bounce’ being evident.

The recent American data also fits with data from China which represented growth but not as fast as expected and supports the view that the global economy still hasn’t quite shaken off much of the uncertainty of COVID.

Case numbers in America have been rising steadily since June, and concerns over the Delta variant and some recent floods in China have really dented some of the more recent optimism over the global economic outlook.

Combine this less than perfect economic picture with the threat as the Taliban have taken back Afghanistan, and the currency markets are anxious and cautious, which is being reflected in the rise of the US dollar.

GBPUSD levels have dropped almost 3 cents between the high of almost 1.40 at the end of July and the lows we are very close to of the lower 1.37s currently.

Only time will tell whether this latest twist in sentiment will persist or not, it might be that this dip in the data is reflective of the spread of the delta variant some weeks ago as much of the data is from July.

The Afghanistan situation will be interesting to monitor, as it marks a shift in attitudes by the West from one of intervention epitomised by the failed Iraq and Afghanistan invasions. China and Russia are already keeping communications open with the new rulers of Afghanistan and all eyes are on how the US, the UK, and the West will respond.

The US dollar accounts for 60% of globally transacted foreign exchange so has a real bearing on not just US dollar trades and pairings, but also others. Sterling’s recent slide against the Euro and rise against the Aussie can be attributed to the strength of the US dollar for example.

So, no matter what pairing you are considering, it is well worth being aware of events on the US dollar, please speak to our team to learn more about the latest news and forecasts ahead, plus all your options to help you get the best chance to achieve your desired exchange rate.

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).