JONATHAN WATSON
July 23, 2021

STERLING SUPPORTED AS ‘R’ NUMBER DROPS BELOW ONE

The pound enjoyed another good day yesterday rising back over 1.17 on GBPEUR and 1.38 on GBPUSD

The pound enjoyed another good day yesterday rising back over 1.17 on GBPEUR and 1.38 on GBPUSD as falling case numbers supports the idea that the third wave of COVID cases has peaked, and that the UK government’s gamble on opening up the country in the face of the rising infections might have worked.

Case numbers reported yesterday in the UK were 24,950 versus 39,950 one week ago, with the Times reporting today that the all-important ‘R’ number (or rate of infections) was now less than one showing the spread in decline once again, quoting Dr Christopher Jewell, who advises the government on policy relating to the easing of restrictions.

The pound has performed well in 2021 as the UK has been a leading light in the race to vaccinate, with many investors predicting the UK will benefit from a surge in economic growth as restrictions are eased and business and consumers can start spending again.

Pound Remains Strong During June

Where last week sterling retreated as the rising case numbers and ‘pingdemic’ forced many analysts to consider just how rosy the future was looking, this week’s news seems to suggest all was not as bad as it seemed and we shouldn’t be overlooking the previous optimism just yet.

What is clear is that the virus is still very much out there and has proven itself capable to mutate, any positive signs are welcome but there are still likely to be many hurdles to clear before we can really get back to normality, importantly with international travel.

The Times goes onto suggest that the falling cases might be because Euro 2020 lead to a sharp increase in cases as millions were more likely to socialise, and the recent fall this week might be partly due to schools breaking up and the falling away of the social ‘web’ of interactions this creates.

The pound has displayed once again its sensitivity to the case numbers and the trajectory of any recovery in the pandemic. According to many reports the pingdemic has caused many to be absent from work which might in being reflected in the economic data, may influence sterling rates ahead.

For any clients interested in buying or selling the pound ahead make sure you have highlighted your position and interest to your account manager here who can keep you informed of the latest twists and turns in the market, and help to ensure you are acting with as much information as possible.

This week is light on actual UK data and so sterling may continue to react to the headlines around case numbers as highlighted above. In terms of more global events to influence sterling, keep an eye on the latest US Interest Rate decision which is covered in my US dollar section as any shifts in sentiment towards the US dollar can often influence the pound, Euro and other currencies.

EXPECTATIONS OF CONTINUED LOOSE MONETARY POLICY KEEPS THE EURO WEAKER

2021 continues to be a challenging year for the Euro as it remains near the lower points of the year following the latest European Central Bank meeting where it appears monetary policy will remain soft or ‘dovish’, with interest rates unchanged and set to remain negative for the foreseeable future.

This perhaps unsurprising and cautious tone seems sensible given many countries in the EU are still battling the pandemic and whilst vaccinations are continuing, an initial reluctance to embrace the vaccine might have slowed the potential economic bounce back factor.

When we compare the Eurozone too to the UK and US dollar there is a difference in tone from the central banks, with both the Bank of England and the US Federal Reserve planning future interest rate hikes and focusing on the economic recovery ahead.

Interest rate policy is vital to understand movement on the currency market as generally speaking a rising (or predicted to rise) interest rate by a central bank will see that currency rise in value, in a similar way that a higher interest rate for a bank account will attract more investment.

With the Delta variant now dominant in much of Europe, the potential for rising cases and a delayed return to normality could continue to hamper the economic recovery necessary to trigger a change in monetary policy.

We know that tourism is of huge importance to the Eurozone and this sector has been one of the worst affected by the pandemic. There is continued unpredictability and a lack of clarity over international travel which looks set to only continue to cloud the outlook ahead.

For Euro buyers with both pounds and dollars, we are close to some of the better points of 2021, with GBPEUR levels back over 1.17 (1.18 was the highest) and EURUSD 1.18 (the low was 1.17).

For the Euro this week there is not a huge amount of new data this week, although German Inflation Thursday and German GDP (Gross Domestic Product) on Friday may influence sentiment in providing the latest news on recovery in the biggest economy in the Eurozone.

Clients interested in GBPEUR levels might wish to keep in touch with their account manager tomorrow and Thursday, since we have the latest US Interest Rate decision tomorrow evening and this can often influence not just the US dollar but also other currencies connected to it like sterling and the Euro.

Impressive Jobs Recovery Supports USD Value

WHEN WILL THE US FEDERAL RESERVE HIKE INTEREST RATES AND HOW HIGH?

The US dollar accounts for around 60% of globally traded FX and has a huge importance in the currency market for nearly every pairing out there. When we see a shift in sentiment on the US dollar it can have wide ranging consequences and with the US Federal Reserve meeting tomorrow we could see some news that might influence US dollar rates, but also other pairing like GBPEUR.

The US dollar has been much stronger in 2021 as investors place bets that the economic recovery stateside will see rising inflation which will force the Fed to raise interest rates, and lead to a stronger US dollar.

This view by the market has not been totally shared by the Fed themselves, with many reports suggesting the rise in inflation was temporary and that overreacting to it with interest rate hikes might not be sensible.

What can cause currency movement is when we see uncertainty as to which way events might take. If for examples it was predicted to be a clear-cut decision with no expectation of any change in tone or policy, it is likely you would see little movement on the rates.

However, in this case at the Fed there is an internal debate about the appropriate action to be taking place. With the currency market having to ‘price in’ the potential for different possibilities, this is where you can see movement as the news comes out and the currency move as the ‘wrong’ outcome is sold off or pounced on by investors.

The main topic for the Fed is not just interest rates but also the ‘taper’ which is a decision on when to stop the flow of asset purchases by the US central bank. This is essentially the purchase of bonds by the central bank to support the economic recovery, sometimes crudely (but maybe not unfairly) referred to as ‘printing money’.

In 2013 following the economic recovery from the 2008/9 financial crisis we had a period of excessive volatility globally on exchanges rates termed the ‘taper tantrum’ as the winding in of asset purchases by the Fed caused volatility across the world.

Tomorrow’s meeting could therefore hold some interesting content for market participants who are monitoring for not only interest rate hikes ahead from the US Federal Reserve, but also for the possibility of ending the asset purchases which have so far propped up the US economic recovery and could lead to some increased volatility ahead for the dollar (and currencies connected to it) as they begin to be winded down.

For more information on the US dollar and important events to move your exchange rate please speak to any of our expert, friendly and knowledgeable team.

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).