Richard Nugent
November 3, 2021

US Federal Reserve to Make Interest Rate Decision

GBP

The pound has started this week’s trading on the back foot by losing ground against its two major counterparts in the dollar and the euro as we await key policy announcements from the Bank of England and the Federal Reserve. This time last week, GBPEUR hit 20-month highs which presented a real opportunity for those in the market to buy euros. However, at the time of writing, the pairing was trading well over a cent lower than the highs seen during last weeks session. To put in context, a client selling £100,000 today would receive €1300 less than they would have during the highs of last week. These rate movements highlight the importance of keeping in close contact with your account manager here at Lumon.

Sterling’s recent strong performance has been buoyed by the expectation of many investors that the Bank of England may announce an interest rate hike during their latest monetary policy decision on Thursday.

As covered in previous reports, inflation levels in the UK continue to rise with the current level sitting at 3.1%. When there are sustained periods of inflation above 3%, the Bank of England governor (Andrew Bailey) is required to provide an explanation to the Chancellor (Rishi Sunak) as to why this is and what he and the bank will do to correct it. It will be interesting to see whether the concern that has built over the last few months has put enough pressure on the Bank to act.

The weaker performance of the pound this week could be attributed to a number of investors shifting their expectations to prepare for a more cautious approach from the Bank. The pound may struggle for support if there is a delay in the announcement of a rate hike or more cautious guidance provided by the Bank.

In the political arena, France have stated that they will delay taking action against the UK, as both sides continue to engage in talks to defuse the latest disagreement over where French and British fisherman can fish post Brexit. The latest dispute is about the granting of licenses to fish in the waters surrounding the Channel Islands.

Today the UK will see the latest figure for services PMI data which is expected to increase to 58 from last months figure of 55.4. This would show that the services sector in the UK is continuing to grow.

EUR

EURGBP traders saw a window of opportunity during yesterday’s session with rates hitting 3-week highs for the currency pair. The paring has been on a downward trajectory for almost a year now with rates hitting a 20-month last week. Fluctuations like this may pose as opportunities for those in the market still looking to sell euros.

EURUSD paints a similar story with rates having generally fallen since May this year and the pairing recently hitting 14-month lows. The ECB’s (European Central Bank) stance regarding inflation has provided little support for the single currency over the last few months. The ECB continue to maintain the view that inflation levels are transitory and that the recent spike in inflation will reduce as we move into next year. This was echoed when they announced last Thursday that interest rates in the bloc would be remaining as they have been for some time at 0%. Many investors and market commentators expect the Bank of England and Federal Reserve to act far sooner than the ECB. If they are right, then we could see the single currency come under continued pressure as we move into the new year.

Manufacturing PMI data which measures the growth of the manufacturing sector was released yesterday and provided support the euro’s stronger performance. The data read 58.3 which was in line with the previous reading at 58.6 and forecast levels of 58.5.

This morning unemployment data from the bloc will be released with forecasters expecting a slight decrease from 7.5% to 7.4%. A reading higher or lower than this could cause volatility for the currency, however, most eyes will be looking towards the Federal Reserves monetary decision tonight and the Bank of England’s tomorrow for an indication of where euro rates could move in the near-term.

USD 

The US has continued to show its status a global safe haven over the last few weeks with the dollar benefiting from investors trust in the greenback. Yesterday saw the dollar gain value against almost all of its major counterparts with the commodity-based AUD and NZD and Scandinavian currencies losing out the most.

The dollar came under support as the Federal Reserve kicked off its two-day policy meeting where many expect they will announce a tapering of their current asset purchasing programme which has been in place since the start of the pandemic.

Investors in recent weeks have begun to price in a movement to tighten monetary policy by central banks globally as many acknowledge the rising concern with sustained high levels of inflation. Many Fed officials have used a similar rhetoric to the ECB in recent months, stating that inflation levels are transitory. However, pressure and concern from consumers in the US has continued to build with inflation sitting at a 30-year high. Many now expect the Fed to act sooner than they would have liked with some commentators expecting two rate hikes in 2022.

The Fed’s interest rate decision will be confirmed at 7pm tonight. Forecasters are not expecting a rate hike at this meeting but any indication or comments suggesting a future rise could provide significant support for the dollar.

Friday will the latest non-farm payroll data release in the US which is a key measure of the number of new jobs added in the economy outside of agriculture. This is expected to be 450K following last month’s disappointing figure of 194K. This release can cause significant volatility for the dollar so if you have an upcoming exchange involving the dollar, please reach out to your account manager here at Lumon ahead of time.

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).