A couple weeks back the pound gained over 1.5% in two days against the euro after the failure of the Scottish National Party to gain a majority. However, since this news the price of the pound against the euro has been rangebound and spent the week commencing 15th May within three quarters of a cent (between 1.1575 and 1.1650).

Danske Bank are confident the UK economy will outperform Europe’s. They forecast GBP/EUR exchange rates to trade at 1.2050 within 12 months but admit it will be gentle gains. Mikael Milhoj Chief Analyst at Dankse Bank confirmed their stance suggesting the UK is gradually reopening with its roadmap passing another stage recently. A world leading vaccination programme, which surpassed 60 million doses this weekend and businesses now starting to get used to the new post-Brexit EU-UK trading relationship, means the outlook for the UK economy looks bright.

Nevertheless, the post-Brexit trade relationship is still a worry, many fear the pandemic has put a blanket over Brexit. Glimpses of this fragile relationship were seen with recent fishing rights protests in Jersey. A fragile place which has always seen conflict throughout recent history is Northern Ireland, with it being the UK’s only land border with the EU it was a huge stumbling block in negotiating a deal. The section of the Brexit deal covering Northern Ireland is known as ‘the protocol’, Boris Johnson at the time labelled it as “a great deal” and “Oven ready”. It was designed to protect peace by avoiding checking of goods on the border of Ireland. The protocol is meant to support the Good Friday Agreement of 1998. But some European laws continue to apply in Northern Ireland, which has caused unrest in local Unionist communities. They claim the UK government have left them out in the cold. A few examples of the protocol in the real world are; imports of plant and animal products such as Cheese from Britain into Northern Ireland now require multiple forms to be filled out. These delays and form filling processes left supermarket shelves for some products, empty at the start of the year. Secondly, people moving from mainland Britain to Northern Ireland now need a customs declaration for their possessions if they use a removal firm.

Brexit Trade and G7 Summit

Lord David Frost the minister of state at the cabinet office has come out this weekend and said the UK failed to secure the deal it wanted for Northern Ireland. Blaming the pressure, the government was under at the time for the failure of the deal. Whilst briefing fellow MP’s Lord Frost acknowledged the way the current protocol is operating is “undermining the Good Friday Agreement rather than supporting it”.

Recently interviewed Lord Frost made clear the UK will not agree to align its food rules with the EU, which has been tipped by many as the solution to remove the border checks. Further stating he is seeking an equivalence deal where both sides respect each other’s rules, but he admits the EU have been reluctant to even begin discussions on the topic.

In contrast to this, according to the Office of National Statistics, trade between the UK and the bloc recovered in March with the exports of goods to the EU increasing by £1 Billion (8.6%), driven largely by car exports. This news among other factors has caused Economists surveyed by Bloomberg to amend their growth forecasts for the UK in 2021 to 6.0%, which would mark the strongest annual expansion for the economy since 1973 and means it will grow ahead of the likes of Germany (4%) and France (5.5%).

Eyes will be Bank of England Governor Baileys comments on Monday, the markets are susceptible to volatility off the back of these meetings.

Euro Struggles, But Will there be Good Times in the Near Future?

The euro has been struggling against the pound for most of this year. Yet is there a better outlook now for Europe?

Robert Alster Chief information officer at Close Brother’s asset management seems to think so. He suggests the slow start is not proving to be an unbeatable hurdle. The quickening pace of vaccinations and a sharp bounce back in global trade activity has caused the European Commission to forecast a 0.5% increase in their year growth prediction, up from 3.7% forecast in February to 4.2% now. Alster goes on to state the biggest risk to the euro recovery is the North/South Divide, countries like Germany in the north of the continent are on track for their economy to return to normality whereas Spain has been the hardest hit.

In my last report, I touched on the EU’s €750 billion bailout package. The package will be used by member states to address the economic and social impact of the pandemic, ensuring their economies undertake a green, environmentally focused agenda. There are strong doubts on how some countries in the Bloc plan to use their funds. Eastern Europe is notoriously known for their coal and gas dependent societies, a history the European commission are keen to significantly reduce by the 2030's. It is estimated Poland will receive €58.1 Billion and Romania will receive €29.2 Billion in recovery funds. Yet their plans are largely to use their recovery funds to intensify their extraction of fossil fuels and building of highways. Fears are two of the largest recipients of the recovery funds and a combined total of around 12% of the total €750 billion are simply going to ‘waste’. Their projects do not align with Ursula Von der Leyen’s green agenda.

Countries in the Bloc who rely heavily on tourism will have gained some confidence from the recent easing of lockdown and travel restrictions across the continent. The EU has recently moved another step closer to reviving free movement of its citizens after reaching a provisional agreement on an EU COVID travel pass. Although the legislation is not passed yet it is expected to be of huge significance once it is agreed. The EU Digital COVID Certificate (EUDCC) will allow for travel restrictions to be eased across all 27 member states and a handful of other non-EU countries. It will consist of information about an individual's vaccination, any recent test results and current recovery status regarding COVID-19. The holder can choose to carry either a digital (QR code version) or paper-based certificate. The regulation is officially set to come into force on 1st July with a 6-week phasing in period to allow any countries that need extra time. However, Ursula von Der Leyen said on Thursday the system would be ready in the coming days and countries can soon begin to roll out the pass.

This week is quiet for euro based economic data.

US Dollar, the Worst Performing G10 Currency in May

US Dollar, the Worst Performing G10 Currency in May

The dollar has been suffering in May, it is the worst performing G10 currency month to date. On 21st May GBP/USD also known as cable, surged towards a 3-month high of 1.4243 but failed to break the resistance level and fell 9 pips short reaching 1.4234. EUR/USD the most traded currency pairing has been trading over the psychological 1.20 level almost consistently for the last month. The pairing tested Februarys previous high of 1.2244 twice in May. Deutsche Bank make the argument that EUR/USD levels could surge to 1.25 in September, with the lag in vaccine roll out being shortened by Europe. Second to that a lagging job market in the US and huge levels of consumption following the stimulus cheques will drag the dollar down.

The Federal Bank is tipped to be the last central bank of the G10 to amend its Quantitative easing (QE) programme. QE which put in simple terms is a central bank increasing money supply and stimulating economic activity, is often seen as a weakness for a currency. This is done by the purchasing of longer-term securities and government bonds. QE keeps interest rates low and can typically make importing of goods more expensive. Thus, increasing cost of production and consumer price levels. A rising cost of goods is known as Consumer Price Index (CPI) and it is often a closely watched piece of data.

Inflation in April grew at its fastest pace in more than 12 years as the US economic recovery kicked into action. Consumer Price Index, which measures the cost of a basket of goods as well as energy and housing, rose to 4.2% from a year earlier. A Dow Jones survey had expected a 3.6% increase. The month-to-month gain was 0.8%, against the expected 0.2%.

Some real-world examples of inflation in the US are; Lumber prices have risen 124% in 2021 amid persistent demand for building materials. Copper which some of you may know is seen as a silent indicator to economic wealth due to its wide range of everyday use, has climbed nearly 36%.

However, many argue year on year comparisons are simply distorted, as rewind a year ago and the US economy was pretty much shut down as the pandemic was tightening its grip. This is one of the key reasons why Federal reserve policy makers are dismissing current data. They are confident inflation levels will ‘settle down’ to the 2% range the central bank had targeted initially. One way to counter rising inflation is to hike interest rates, a move Fed officials have repeatedly said they will not do unless inflation soars above 2% over a sustained period.

The dollar is widely known as a safe haven asset that investors will flock to in a time of crisis. The Fed’s long term soft outlook on interest rates and its bond buying program have caused many investors to seek gains elsewhere. The week ahead provides a lot of USD based data, with the two key pieces of data initial jobless claims (number of people who filed for unemployment) and Q1 GDP both come out on Thursday. Any significant findings could cause market volatility for the dollar.

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