Currency markets remain tightly range-bound

Jeremy Thomson-Cook
Jeremy Thomson-Cook 08 September 2021

GBP: BoE rhetoric mirrors Fed in run-up to hearings later today

EUR: Growth revised up but remains a lacklustre 2.2%

USD: FOMC comments in focus, as 10yr Bond Yields up to 1.38%

Sterling

With MPC and Fed members re-iterating a “wait and see” approach and a willingness to see through the current inflationary pressures, it’s hard to see where Cable will break out of the current ranges. Whilst wage growth figures reflect staff shortages across industrial sectors as the UK emerges from the pandemic, inflation figures remain on target. This is despite rising input prices due to energy costs and continuing supply chain issues. The MPC will be under no pressure to tighten just yet, and consequently, the pound will struggle to gain.

Yesterday Boris Johnson announced a 1.25% rise in National Insurance from April 2022 in order to pay for changes to the way social care is managed in the UK. The Bank of England will consider how this will affect real incomes and indeed business spending and the rise in NI will have a similar effect to a rise in interest rates in this way.

The next UK economic data is released Friday but is unlikely to be of great significance. Markets will be keeping one eye on comments made later today as Andrew Bailey testifies in front of the Treasury Select committee. Don’t expect too many surprises. Gains against the euro and commodity currencies are more likely than against the dollar.

Euro

More bad data on Tuesday for the Eurozone as GDP is revised to a lacklustre 2.2% from 2% Q/Q, and European and German ZEW consumer sentiment under-shot expectations, indicating German business confidence remains worryingly low. We should remember Germany was in recession pre-pandemic and coming out of the pandemic growth rates should be far higher than 2%.

Thursday is a big day with the ECB meeting, but they don’t have many tools left in the box to stimulate growth. The euro has had a slight resurgence recently due to steep rises in input inflation, hitting nearly 12% annualised, but is hard to see the ECB split from the accepted view that inflationary pressures are transitory and should be disregarded for now.

USD

FOMC speakers this week will be in focus but without any major data and a backdrop of disappointing labour market data, we would not expect hawkish comments or any indication that the interest rate normalisation curve is likely to alter any time soon.

The US is experiencing very high numbers of Covid hospitalisations, and with government spending high and monetary policy so loose, the dollar will struggle to gain on fundamentals. Bond markets may well drive positive dollar movements this week, with 10yr yields hitting the August high of 1.38% on Tuesday. The markets appear to be responding to the expectation of rising inflationary pressures later this year. In terms of economic data, we have the release of the Beige Book later today – an indicator of localised economic performance across the US.

Elsewhere

Australian Monetary policy is pulling in different directions, having regained lost ground lately on expectations of tightening Tuesday’s decision was less hawkish than expected. Later today we have a Bank of Canada rate decision. Japanese quarterly GDP was better than expected at 0.5% earlier today.

Market rates

Today’s Interbank Rates at 09:17 against sterling. Movement vs yesterday.

Euro €1.164 
US dollar $1.375 
Australian dollar $1.870 
South African rand R19.70
Japanese yen ¥151.6 

Have a great day.