The last week was a positive one for Sterling exchange rates with GBPEUR hitting 1.1670 and GBPUSD going to 1.4250 due to positive UK data over the week. Generally, we have had pretty boring FX markets over the last couple of weeks with prices moving in relatively tight ranges- I feel with the economies reopening across the globe coupled with new variants and uncertainties surrounding most countries- investors are sitting on their hands for the time being.
The U.S gave us yet another underwhelming jobs report on Friday, which has led to the U.S Dollar weakening against most major currencies- the big question at the moment is whether the Fed will begin tapering their QE purchases soon- there are whispers that talks may begin around August- and we can see that markets are nervous about this as inflation is rising. At this point I do feel the market is over reacting on this, we know tapering will come, but the Fed will not want to spook markets and cause a massive drawdown across asset classes- there will be ample notice in my opinion to give markets time to adjust and rotate.
The big question in the UK is whether we will move to the next stage of reopening later this month- the language coming from the UK Government right now is that nothing in the data is suggesting that the date should change, however after looking at things closer, the initial plan was to move to a complete return to normality- which I do feel will change. I think it is highly likely that the Government will continue with their plan to finalize reopening- but with the caveat that masks and social distancing remain- vaccination rates are still strong in the UK, and though cases are rising, this was to be expected, and the main data to watch is hospitalizations which at this stage is not at an unmanageable level. Vaccines are now being rolled out to the under ’30s as of Monday and with this in mind, I do not see any reason to go back on the plans of reopening hospitality, etc- just some restrictions will remain.
As far as economic data is concerned, the first part of the week is relatively quiet- things will begin to get interesting on Thursday as we have the ECB interest rate decision- the Euro has seen a lot of strength recently, and it will be interesting to see if the ECB is comfortable with where the EURUSD is trading and if it is talked down at all- we are not expecting any change in interest rates but I will be watching to see if any talk is given on tapering of QE and asset purchasing.
On Thursday we also have inflation figures being released in the US- and we are forecasting a rise to 4.7% for May which is a 0.5% increase from April- this may fuel the taper talk and we could see stocks come down a little and the Dollar lose gains across the board if this is the case. We also have jobs data in the U.S where we are expecting less jobless claims on the week which will help the Dollar as employment is the biggest subject at the moment.
On Friday we have trade balance, industrial and manufacturing production data out in the UK, which will give us a good idea of this side of the UK economy- and most importantly UK GDP figures, which are expected to come in stronger, if we do see this then I see the Pound ending the week strong.