It was another volatile week following the Fed meeting in the U.S- when Jerome Powell signaled to the market that talks of tapering QE may begin later this year (Expectation is Jackson Hole in August)- which has begun to set fears into the market. We saw the Dollar index strengthen after the meeting and the Dollar was King until the end of the week- we saw GBPUSD move from 1.41 down to 1.37 and EURUSD move from 1.21 down to 1.18. The biggest fear currently in the market lies in inflation numbers- which are rising quickly everywhere- generally to curb this interest rates have to go up, but with no hikes in sight for 2021- the next best thing is to cut the money printing- which has markets extremely nervous. We also had Fed’s Bullard mention on Friday that tapering talks were mentioned in the last Fed meeting, which set both equity and cryptocurrency markets on a drop through the Friday session.
What was interesting to see was the reaction in the GBPEUR exchange rate, which we saw climb to 1.17 on Thursday before a slight drop back down to the 1.16 area- but for now, if you are looking for potential upside, GBPEUR definitely has more than GBPUSD at the moment.
The main event for those of you trading Sterling this week is the Bank of England interest rate decision on Thursday- like the U.S, The UK has also seen a rise in inflation above the BoE’s 2% target, however the UK is not looking for an overshoot like the U.S- and will shift policy based on the data provided. Essentially, if we see a hawkish tone from the BoE on Thursday, I see no reason why GBPEUR doesn’t reach 1.18- but this will depend on talk of interest rates going up over the next couple of years and a positive sentiment surrounding the UK economy.
The only downside risks I can see at the moment are that the UK has extended restrictions for a minimum of 4 weeks- which will have further impact on travel and airline companies etc- and there is not much confidence in the fact that the Winter will be “restriction free” which will of course impact spending and earnings in the UK- so though some data in the UK may look positive for now, policy makers will be looking months/years ahead to try and make their decisions (Not a job I would want).
Aside from the BoE we do have some other data releases of interest, such as ECB President Lagarde’s speech on Monday, a speech from the Fed’s Williams on Monday evening, Eurozone and UK PMI numbers on Wednesday, and Michigan sentiment on Friday.
As always if you have an upcoming transaction you would like to discuss- please don’t hesitate to contact me.