Thursday saw an impressive trading day for sterling as it continued its long-term rally against the Euro. GBP/EUR rates reached a daily high of 1.1706, a two-and-a-half-month high which had not been seen since Tuesday 6th April. This was largely down to the remarkable strength of the greenback and the huge sell off in the single currency. However, the Fed are not the only central bank tipped at raising interest rates, the Bank of England has long been tipped to alter interest rates before any other central bank. This has contributed to sterling growth against the dollar and euro.
The pounds solid performance of 2021 has caught the eye of many FX analyst’s so far and none more so than the team at HSBC. The team is led by Paul Mackel the Global head of FX research for the bank, who declare themselves as GBP pessimists. The pound has been the second best performing major currency pair, only topped by the oil backed Canadian dollar. Sterling has risen by 4% against the euro and 3.35% against the dollar. Mackel suggests the pound has outperformed this year and is skeptical the trend can continue with expectations that are so elevated compared to reality. Mackel is convinced investors are ‘betting’ that further gains are likely which he describes as an ‘optimistic frenzy’. Mackel supports findings from the International Monetary Market (IMM) that relative to historical levels, sterling has only seen a greater long (Buy or upward trajectory) positioning on a handful of occasions in the last decade. The IMM is a large well-known exchange established in 1972 who deal with trading of currency, interest rate, bitcoin and commodity futures. Their research and data are often highly credible. Mackel’s team at HSBC’s research suggest the pound tends to weaken when IMM positioning data is high and rising. Mackel goes on to state UK interest rate news has been a key driver of sterling strength recently, but there is a possibility the interest rate could potentially be detached from the current value of the currency.
Other notable factors include that Mackel’s team are keen to highlight Brexit readjustments and the UK's imports numbers higher than its exports are seen as a long-term stumbling block for sterling. In addition, the UK’s vaccination rate has now fallen back behind Canada, U.S, Germany and France with little signs that it will recover its once world leading position due to supply shortage fears. All topped off by the Delta (Indian) variant of COVID-19 delaying the unlocking of the country.
HSBC have adjusted their forecasts for sterling backed pairs, with cable estimated to be trading at 1.40 by end of June 2021 and 1.34 by the end of 2021. GBP/EUR rates are predicted to be trading at 1.1764 by the end of June 2021. One eye catching forecast is the bank estimate GBP/EUR rates to be trading at 1.0894 by the end of 2021. These predictions alone from the 6th largest bank in the world is enough to spark a conversation with your account manager here at Foreign Currency Direct.
The euro has suffered throughout 2021 and Thursday was another day to forget for the single currency. EUR/USD is the most traded currency pair across the world with an estimated 28% of all market volume taken up by this pair alone, double the volume of the second largest pairing (USD/JPY at 13.3%). On Wednesday and Thursday EUR/USD was bearish, the pair reached highs of 1.2130 on Wednesday and dropped down to lows of 1.1890 on Thursday, smashing through the psychological 1.20 level with the euro unable to find any support. Eurozone inflation rate data came out at 2% the same as forecasted levels, so the single currency was unable to find a lifeline from this data. Similar news to report for GBP/EUR rates, as the euro was unable to maintain any grip on sterling. The huge sell off in Euros from EUR/USD gave a perfect opportunity for sterling to slipstream into pole position.
On a more positive note, for the euro on Wednesday Portugal was the first EU country to receive Brussels’ approval for its COVID-19 recovery plan. In my previous reports I have discussed in depth about the EU’s €750 billion bailout recovery package plan. Ursula Von Der Leyen personally travelled to Lisbon to meet Prime minister Antonio Costa to deliver the news. Her comments go on to say ‘the plan clearly meets the demanding criteria we have jointly established. It is ambitious, it is far-sighted, and most importantly it will help build a better future for Portugal, for the Portuguese people and for the European Union. There is no doubt it will deeply transform Portugal’s economy’.
Portugal will receive its first tranche of funds in July, the plan totals €13.9 billion of grants and €2.7 billion of loans. Guidelines set out by the European commission state at least 37% of expenditure must be invested in reforms that support climate objectives and 20% towards digital transition. These requirements are met with Portugal’s plan, with 38% and 22% respectively. Portugal is set to invest in sustainable urban transport, with metro expansions in Lisbon and Porto. Topped off with electric and hydrogen buses. The country is also investing in basic digital training for citizens and upgrades to government administrative systems. One final factor to spark some life into Portugal’s economy is a €5 Billion investment into innovating and strengthening indebted companies.
Nevertheless, it is estimated Portugal’s national debt is one of the worst in Europe around 148% of its GDP, a jaw dropping €296 billion worth of debt. Whilst to me and you the billions being handed out to Portugal as part of the bailout package are eye watering figures, they are dwarfed by the ever growing €296 billion debt bill the country suffers.
The Federal Reserve (The Fed) concluded its two-day meeting with increased expectations for inflation throughout 2021. US inflation is rising at a faster pace than expected and the economy is predicted to grow at its fastest pace in decades. The Fed’s new inflation forecasts have been increased to 3.4% for this year a whole percent higher than the previous estimate of 2.4%. Early indications of inflation for 2022 and 2023 are both estimated at 2.1%.
One way to counter rising inflation is to raise interest rates. Federal Open Market Committee (FOMC) members signaled their ‘dot plan’ to raise interest rates twice in 2023. To briefly explain the concept of a dot plan, there are eighteen FOMC committee members who meet every quarter. A chart is drawn up with a few years’ time frame along the bottom (X axis) and interest rates going up in 0.5% segments up the side (Y axis). Each member places a few dots on the chart of where they think interest rates will go over the short, medium and long term. This then gives us a consensus from some of the most powerful people in America of where the interest rates may be heading.
Thirteen of the eighteen members of the committee believe the Fed will increase rates in 2023 and the majority think the central bank will hike interest rates at least twice that year. Compare this to only seven members who thought this was a possibility back in March 2021 meeting. The remaining five of the eighteen FOMC members from Wednesday’s meeting see the Fed staying put and not hiking rates through 2023. It is reported that seven of the eighteen FOMC members even go as far as suggesting interest rates could be increased in 2022.
This news caused major volatility across the currency market late Wednesday evening through to Thursday. The Hawkish comments that had come out of the meeting sent the greenback on a rampage and caused shockwaves through wall street as the stock markets felt the force as investors pulled the plug on stock investments.
Federal Reserve Chair Jerome Powell warned against reading too much into the ‘dot plan’ and suggested to take any comments with a ‘big grain of salt’. However, in a comment post the meeting he stated, ‘you can think of this meeting that we had as the ‘talking about talking about’ meeting, if you’d like,’ could he be hinting towards some truth lies in the ‘dot plan’?
Investors worldwide have been wondering when the Fed will taper its bond buying program which has held up the US economy through the pandemic. Powell acknowledged the central bank is monitoring data coming out of the country and have not made any decisions on ending its bond purchases. Powell went on to say ‘I now suggest that we retire that term, which has served its purpose’ could this shine some light on the end of the bond buying programme is near?
Cable rates were floating around highs of 1.4120 on Wednesday 16th and had fallen almost two cents to 1.3925 at the time of writing on Thursday, showing the sheer weight of the news on the dollar.
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