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US is in no great rush to raise rates

The Pound fell to a seven-week low against the Euro

The Pound fell to a seven-week low against the Euro on the final day of August amidst a strong rebound for the single currency. August was a mixed bag for Sterling, on 10th August Sterling/Euro exchange rates hit an 18-month high to climb to 1.1834. These levels were quickly rejected for a second time in 2021 suggesting levels over 1.18 provide a serious resistance. In stark contrast three weeks later Sterling/Euro exchange rates fell to 1.1630, a two cent drop from the previous high and the lowest exchange rates since 21st July.

Karen Jones Head of Technical Analysis at Commerzbank, comments on the fact the Pound/Euro exchange rate is ‘correcting’ itself from the highs experienced in August. Jones and her team support further short-term weakness for the pound and supplied some forecasts of where she thinks rates will head. A decline to 1.16 and even touching the 20th July low of 1.1530 could be up next for Sterling. Jones adds some mild positivity for Sterling’s by suggesting if the key support level of 1.1460 holds out the long term outlook for the Pound should remain bullish. Nevertheless, if this above-mentioned support level is reached it means just over 3 ½ cents and much of the hard work since the turn of the year would have quickly been undone. On the other hand, it could provide a window of opportunity for Euro sellers to exchange at some more favourable levels.

In one of my previous reports, I wrote about Brexit and the Northern Ireland protocol. In a nutshell the protocol is the deal agreed by the UK and EU to prevent a hard border between Northern Ireland and the Republic of Ireland post Brexit. Its aim is to keep Northern Ireland in the EU’s single market for goods, meaning goods do not need to be checked as they cross the Irish border. The protocol was so underwhelming and poorly constructed that in ‘Grace periods’ initially for 6 months, were implemented meaning rules outlined by the protocol were not enforced. Some significant Grace periods are set to expire on 1st October 2021, with many fears that food supplies and costs in Northern Ireland will be substantially impacted. These Grace periods have already been extended twice and have caused friction between the EU and the UK. Leo Varadkar Irish Prime minister stated the extension of Grace periods would be welcomed but ‘the difficulty is it doesn’t deal with the underlying difficulties – it just puts things off’. Varadkar acknowledged it would be up to the EU and the UK to discuss the next steps. Yet the European Commission began legal action against the UK for the most recent extension in March, the relationship between the two parties seems wafer thin. This highlights the underlying issue of Brexit and its potential to weigh down on Sterling exchange rates.

Natwest remain positive on the outlook for Sterling due to its well defined exit strategy post pandemic, GBP/EUR rates have risen 5 % (to current levels) since the 1st January.

Eurozone inflation has hit a 10 year high

The Euro has been one of the better performing major currencies post the Jackson hole meeting, gaining ground against the dollar and a basket of other currencies. The European Central bank is expected to raise interest rates well behind many other central banks worldwide. Estimates are suggesting 2024 will be the arrival of the interest rate hikes, a move which has provided strength for Sterling and the Dollar against the single currency.

Federal Reserve chair Jerome Powell’s Jackson hole speech suggesting the US is in no great rush to raise rates has led investors to believe the gap between monetary policies of the ECB and FED are not as large as first thought. On Tuesday Europe’s Consumer Price Index readings came out at 3%, 0.3% higher than first forecast. As a result of these figures, two key members of the ECB’s board commented that ‘the time for a reduction in extraordinary monetary support was nearing’.

Klass Knot president of the Dutch central bank De Nederlandsche Bank said inflation levels (released on Tuesday showed Eurozone inflation has hit a 10 year high) have now reached a level that warrants an immediate slowdown to stimulus, preparing a return to pre-pandemic policies. His Stance was reinforced by governing council member Robert Holzmann who suggested the ECB should start debating how it will phase out its pandemic stimulus programme. These comments could provide evidence the ECB is preparing to move away from its ultra-dovish tone, which will only add fuel to the Euro’s fire.

Eurozone unemployment levels are slowly improving July’s reading of 7.6% down from the 8.2% recorded in April shows increasing strength for Europe’s job market. However, ING noted countries across the Bloc are slowly ending their version of the furlough scheme and there are possibilities the ‘true’ number of unemployed are yet to be revealed.

US economy is operating at 93% of pre-pandemic levels

The Greenback has benefitted from growing concerns across the Globe about the spread of the Delta variant. Lockdowns in Asia and Australia have caused some uncertainty amongst investors who flock to ‘safe-haven’ assets such as the Dollar in times of need. This safe-haven title and the Federal Reserves stance on tapering monetary policy has fuelled the Dollars recent strength. Nevertheless, yesterday the dollar started to soften ahead of today’s Non-Farm Payrolls data (NFP). The market remains tentative as investors follow the US job market data closely. NFP effectively measures the change in number of people placed in new jobs, excluding the farming industry from one month to another. Positive readings can symbolise a strengthening job market, thus having a vast positive impact on the US economy. This NFP is being tipped as one to pay close attention to, supplementary jobless benefits run out next week for many individuals across the country. If today’s NFP result is softer than forecasts it could add more pain to the Greenback, the reading needs to be extremely positive to take the burden of ending of the jobless benefit programme.

The US economy has been the world leader in growth post pandemic, with some estimates suggesting the US economy is operating at 93% of pre-pandemic levels. Yet there are some growing concerns coming out of the States, Delta variant and Consumer problems (such as supply chain issues) are starting to weigh the Dollar down. A combination of factors has led Morgan Stanley to slash its Q3 GDP estimates to 2.9% down from 6.5% and Q4 forecasts remaining at 6.7%. This could be the first signal of the slowing down of the US economies remarkable recovery. Cable rates climbed to its best levels (1.3835) in just over 3 weeks yesterday and EUR/USD trading at its best level (1.1870) for a month as some very small cracks appeared in the Greenback.

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