The pound has got off to a slow start this month, currently 0.4% lower in value against the euro and US dollar. GBPEUR are at current two-week lows and GBPUSD at three-month lows.
Bank of England Governor Andrew Bailey spoke yesterday morning providing fresh guidance and outlook for interest rates and economy in the UK.
Governor Bailey reiterated that current rising inflation levels in the UK would be temporary, with supply and demand expected to recover to normal levels in time. Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples.
Why is this important? Foreign exchange markets react to expectations of rising or falling interest rates. A key ingredient in the decision-making process lies with inflation figures and whether there is a danger it is rising or falling too fast. Therefore, when inflation figures are higher or lower than “normal” you can expect central banks to step in and potentially raise or lower interest rates, which is likely to affect the currency in question.
Current inflation figures, as reported by the Office for National Statistics in June are above the banks target of 2%, currently at 2.1%. The Bank of England expect inflation figures to rise to 3%, which hasn’t been seen since 2012 and will be considered as very high.
Governor Haldane has aired his concerns, stating “the Bank and government were fuelling an overheating economy with their stimulus programmes and said it was therefore approaching a dangerous moment”. Haldane went on to say the Bank’s extraordinary support should be reduced or risk destabilising the economy and financial system in the future.
In other news… Britain has reported 27,989 new Covid-19 cases yesterday which is the highest number since January this year.
Over the last seven days, we have seen a rise of 72% in cases compared with the previous seven days, which is quite a hike.
The euro football tournament has come under scrutiny for aiding the spread of Covid-19 in the UK, which is understandable. Deaths over the past twenty-eight days has also risen by 11%. These figures will play a factor in government decisions moving forward and can ultimately play a factor in the currency markets as policy decisions are affected. In the UK, 44.9m people have received a first vaccination dose with 33m having received their second dose.
British Labour leader Keir Starmer has retained his parliamentary seat in the north of England which has provided the Party with a boost. Although he retained his seat, there were just over 300 votes separating Labour and George Galloway of the Workers Party of Britain, which highlights neither Party were able to dominate in this region.
TOURISM LEVELS AS LOW AS 50% IN SOUTHERN EUROPE
Tourism in the eurozone is key to many countries’ economies in the Bloc. The summer season in southern Europe’s economies will be less than sizzling as Covid-19 spreads like wildfire across the UK and the world. A European Union Covid-19 travel certificate launched on Thursday may help the situation, however tourist hotspots are set to be well down on normal levels, affecting businesses across Europe.
Hotels in the popular tourist destinations of Portugal forecast occupancy rates of just 43% in July and 46% in August, which is a huge loss to the economy. As mentioned in previous reports, tourism makes up a fifth of Greece’s economy. The Greek central bank, this week, have cut forecasts for 2021 tourist revenues from 50% to 40% from those seen in 2019, which again is a huge loss to their economy. Occupancy rates in Greece is currently 35-45%. Spain is in the same boat, with estimates of 45m visitors this year, which is approximately 54% of the levels they saw in 2019.
In the Balearic Islands, where the UK government have allowed travel without quarantine upon return, air bookings currently stand at 80% of pre-pandemic levels. This clearly shows the influence the UK has on tourism across the Eurozone, which could help on the negotiation table. You can’t help but think there could be some political posturing at play post Brexit.
This is a very positive outlook considering the Fed has recently earmarked late 2023 as the likely time to start raising interest rates.
Tomas Dvorak, economist at Oxford Economics is remaining upbeat “Southern Europe could still recoup by the end of the year around 85% of its 2019 levels if vaccine campaigns continue to step up and bring overall infections down”. Tourism will play a factor in the recovery of the Eurozone and the euro’s value. The sooner travel can commence and the UK spends it money across Europe, the better for the Eurozone.
Something to look out for today… European Central Bank’s President Christine Lagarde is due to speak today at 13:30. President Lagarde often holds press conferences detailing how the ECB observes the current and future state of the European economy. Her comments can positively or negatively affect the euro’s value in the short term so it is well worth keeping in touch with your account manager.
USD UP 3% AGAINST GBP & EUR
Throughout June, the US dollar has performed well in the currency markets, gaining approximately 3% against the pound and the euro. This was on the back of new economic forecasts and policy assumptions from the Federal Reserve, which prompted investors to speculate on when the Bank will raise interest rates.
However… Are investors being too positive? A survey from Goldman Sach’s suggest that 58% of their participants expect a lifting of interest rates in the final quarter of 2022 or earlier.
This is a very positive outlook considering the Fed has recently earmarked late 2023 as the likely time to start raising interest rates.
Today, we will see the eagerly awaited US June Nonfarm Payrolls which is a key economic indicator and market mover. Nonfarm payrolls represent the number of jobs created during the previous month, in all non-agricultural business. Monthly changes can be volatile, due to its high relation with economic policy decisions made by the Central Bank, which in turn can trigger volatility in the currency markets. A high reading is seen as positive, while a low reading is seen as negative. Last month we saw a figure of 559k and the markets are expecting 690k today.
The US have had a speedy vaccination programme to combat the ever evolving variants. At it’s peak, their seven day average was up at 250,000 new cases per day in January which has been dramatically reduced to 11,000 last month. Having said this, in the past week the US have seen a jump of 10% from the new Delta variant. The White House are getting prepared for this new wave to hit the US and “surge response” teams are being deployed to react to hot spots. The better the US can keep this new Delta variant under control, the better it will be for their economy and ultimately the US dollar’s value.
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