August 2021

Dollar becomes King for the time being

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Last week the markets were overshadowed by the events unfolding in Kabul and across Afghanistan. With chaos seemingly engulfing the country, investors turned tail from riskier assets and sought the safe haven of the dollar.

This change in sentiment pushed sterling down almost 1.5% whilst the euro to its lowest level for nearly a year. The UK enjoyed a mixed week of macroeconomic data, which started with better than expected employment data; however, the inflation rate was lower than forecast, as were Retail Sales. A picture of a patchy and uneven recovery in the UK emerges when the data are taken together. This is likely to stay the case for the foreseeable future as the spread of the delta variant of Covid continues. Sterling also gave up some of its recent gains against the euro to end the week nearly a cent lower as a by-product of the dollar’s strength.

Afghanistan and, in particular, any signs of America’s hasty withdrawal prompting expansionist moves from China towards Taiwan will continue to concern the market in the week ahead. Also of concern will be the spread of the Delta variant of Covid, and it will be a surprise if risk sentiment improves too dramatically. Away from geopolitical worries, one event will preoccupy traders’ thoughts, and that is the Federal Reserve’s annual economic Jackson Hole Economic Symposium starting on Friday. Until then, with many bankers and investors still preferring their sunbeds to the office desks, it will probably be a quiet start to the week, especially in the UK and Europe, as there is very little on the data docket to excite.

UK

As we said previously, sterling had a miserable week that matched the weather in the UK. And although the weather is forecast to improve, sterling is likely to remain under pressure from the dollar for a while longer. The one bright sign last week was the UK’s latest unemployment report, but with analysts and traders picking on the less than satisfactory elements, it became apparent that the markets were looking for a reason to sell sterling. This week’s domestic data is relatively thin on the ground, with the only major release being the preliminary, or flash, Purchasing Managers Indexes (PMI) released as this report reaches your inbox. The figures are likely to have been distorted by the recent pingdemic as well as supply disruption and are unlikely to move sterling too much.

EU

As with sterling, the single currency remains at the mercy of outside events. With sentiment so risk-averse, it is hard to see too much of a recovery by the euro against the dollar. However, it remains towards the bottom of its recent trading ranges and could well be slightly oversold by institutions, so it may bounce back from its current levels. The euro gained against sterling last week, but this was the dollar bossing sterling more than any euro strength. As with the UK, there is very little to get economists excited this week with just the August Purchasing Managers Indexes released today.

Apart from these, it’s all German data starting tomorrow with Second Quarter Gross Domestic Product followed on Wednesday by August’s Ifo Business climate before the week closes with the Gfk Consumer Sentiment surveys. The only spokesperson from the ECB scheduled is Isabel Schnabel, who is speaking both tomorrow and Thursday.

US

Alongside the geopolitical implications of the American withdrawal from Afghanistan, the only other event that the market reacted to last week was the release of the minutes from July’s Federal Open Market Committee meeting. The minutes were non-committal on whether earlier tapering was in order now, with “several” saying a reduction in bond purchases may be more appropriate “early next year”. This week’s key event again revolves around the Federal Reserve, with the Kansas Federal Reserve hosting, albeit remotely, the annual Jackson Hole Symposium, which starts on Friday.

With the Delta variant of Covid forcing the meeting online, the Fed may disappoint the market by choosing to hold policy steady. If this was to happen, the dollar could sell off quite sharply. Data flow starts this afternoon with the August PMIs, followed by New Home sales tomorrow and Durable goods orders on Wednesday. On Thursday, revisions to second-quarter GDP and the weekly jobless report are released. Interestingly, the data week will close on Friday with one of the Fed’s key metrics, the Personal Consumption Expenditures Price Index.

Scandi

The Swedish krona suffered as concerns about geopolitics and financial market sell-offs caused beta currencies to weaken. Moreover, PM Löfven declared on Sunday that he will step down in autumn and won’t be the leader of his party. This does not warrant a new election but will merely see another party member of the Social Democrats take the lead and prepare for next year’s General Election. We will pay attention to the Unemployment Rate on Thursday and Retail Sales as well as GDP on Friday.

The Norwegian krone continues its slide, this time caused by the ever-decreasing core inflation figure. Speculation is therefore rife that Norges Bank Governor Olsen may have to delay his rate hike given the fragility of the recovery.

Another strong week for Sterling

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Sterling enjoyed a solid week last week, touching its highest levels against the euro for 18 months in quiet trading before retreating on Friday as speculators took their profits. Following a solid rebound in Gross Domestic Product, helped and gave encouragement thoughts of the economy returning to pre-pandemic levels before the year is out.

The Bank of England is now firmly positioned as one of the favourite central banks to start implementing a less accommodative policy relatively quickly, as is the Federal Reserve in the US. Their stance will continue to strengthen these currencies against most of the G10, with some exceptions such as the Australian Dollar. The euro is one of the currencies most likely to suffer from this scenario and, despite a recovery in its fortunes of Friday, looks vulnerable to suffer further falls.

The week ahead is another quiet week for macroeconomic data from the Eurozone. Still, this information gap will be adequately filled by a full week of statistics from the UK and some interesting releases from the US.

With the markets firmly in the summer doldrums, currencies can reasonably be expected to stay within their current ranges unless an unexpected event upsets the calm. However, with the Delta variant of Covid causing more problems in the US, a shock from that direction cannot be totally discounted, and it may already be affecting growth prospects if Friday’s unexpectedly sharp fall in US Consumer Confidence is anything to go by. Finally, we will be monitoring risk sentiment closely after the weekend’s events in Afghanistan and any regional repercussions from them.

UK

As previously mentioned, sterling had a good week, especially against the euro. The data flow gets underway tomorrow with the release of the Unemployment rate for July, which is expected to show a modest fall. However, it must be remembered that the ongoing job support schemes still distort it. On Wednesday, the July Consumer Price Index (CPI) is released, a figure that is likely to be slightly unreliable due to the distortion to prices caused by last year’s reopenings in the same month. It will come as no surprise if a lower rate is recorded and probably ignored by the markets. Finally, on Friday, July’s Retail Sales and the Gfk Consumer Confidence readings will be released. Hopefully, after this tumult of information, we should have a much clearer picture of how the economy is recovering, which will set the short-term direction of sterling. Apart from the macroeconomic information, the other influences on sterling’s path will be the speed of the spread of Covid and disputes over the Brexit treaty, which still appear to be rumbling in the background.

Eurozone

A relatively quiet week of data for the Eurozone is in prospect. Still, the reports that are released should make for interesting reading but are unlikely to lend the euro too much strength against either sterling or the Dollar. First off the printing press is the first revision for Second Quarter GDP tomorrow morning with a consensus forecast of around 2.00%. Next up on Wednesday is the Consumer Price Index, which analysts expect to show a relatively subdued reading of 2.2% compared to its main trading partners. Finally, with the German election looming in September and a tight race to replace Angela Merkel developing, the market is starting to watch opinion polls more attentively, and they may come to influence the euro’s direction.

US

With inflation still showing underlying strength in the US and employment on the up, the Dollar continued to shine as more officials make a case for a policy change. Many in the currency markets expect some talk concerning this at the Federal Reserve’s Jackson Hole Symposium at the end of this month. Ahead of the meeting and with a shortage of scheduled speakers from the Fed, Wednesday’s release of the minutes from July’s Federal Open Market Committee meeting will take on more importance than usual. The data week starts tomorrow with July’s Retail Sales, which are expected to be distorted by supply chain disruptions in the car market. Also on the slate tomorrow is July’s Industrial Production, and in addition to the FOMC minutes on Wednesday, Housing starts are released. Finally, the weekly Jobless claims report is published on Thursday as usual.

Scandi

It was another rather uneventful week for the Swedish krona, which was once more very much rangebound against all G10 currencies. The inflation figure came in as expected, thus strengthening the current sentiment that the Riksbank will not take any action for the foreseeable future. This week sees no important data releases.

The Norwegian krone suffered as the White House called for oil production to be increased, despite falling demand. Such macro events seem to drive the krone rather than data releases. This week Governor Olsen is expected to keep rates unchanged on Thursday. The press conference will be a significant event where market participants will look for hints if an interest rate hike is coming or not, given the past eight months of less than terrific data. At the start of the year, a hike for September was pretty much a certainty.

UK and US dominate markets

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As expected, two events dominated the market’s last week, the monthly meeting of the Bank of England’s Monetary Policy Committee and the employment reports from the US.

The Bank was moderately hawkish and is now firmly in the camp of central banks looking to tighten sooner rather than later. As expected, sterling gained against the euro over the week and should continue to do so with the Bank of England now clearly set to tighten before the European Central Bank. The dollar finished the week on an upward trajectory after the Non-farm Payroll report was towards the higher end of estimates reporting just under one million new jobs created last month.

As we approach the height of the vacation season in the UK and Europe, we expect volatility to remain low certainly in most currencies until the end of the month. The upcoming week is virtually devoid of new macroeconomic data from Europe to drive the euro’s price action. Still, there are significant data releases from the US and the UK for the markets to digest. After Friday’s excellent employment number, the Fed’s other main concern, inflation, will occupy the markets when July’s data is reported on Wednesday. The first reading of second-quarter Gross Domestic Product is released in the UK, which is expected to show healthy growth. Sadly, as we have become accustomed to, the daily Covid case numbers will also be studied by investors most closely in the US, where they appear to be increasing. We will also be watching Geopolitical developments as there may be some adjustments to risk appetite on the horizon caused by increasingly belligerent Iran.

UK

The Bank of England’s finger is now firmly on the tapering trigger, and they are ready to gently start cutting back on bond purchases, possibly as early as next month. As the market absorbs the fact that easy money is ending, we expect to see some appreciation in sterling’s value. With life rapidly returning to normal and travel opening up, the economy should continue to expand, lending sterling further support. We should see how the gradual reopening has affected growth this week when the preliminary second quarter’s Gross Domestic Product figures are released on Thursday. Analysts are predicting growth in the region of 5%; however, it should be remembered that this is a backward-looking number and may represent a high-water mark for growth. Also released on Thursday are June’s Industrial and Manufacturing Production.

Euro

The euro looks at the mercy of both the dollar and sterling in the week ahead with hardly any data to alter the market’s bearish perception. With the ECB very unlikely to tighten policy soon, and the single currency will stay vulnerable to dollar strength. This week, there is a virtually blank data docket with only the ZEW Sentiment surveys released tomorrow, which may well fall for a third consecutive month, Germany’s Consumer Price Indexes released on Wednesday, and Eurozone Industrial Production on Thursday. Away from macroeconomics, opinion polls concerning next month’s German elections are starting to influence the euro’s direction as Mrs. Merkel prepares to step aside after nearly 16 years in power.

US

After a mixed bag of employment data early in the week, we saw a solid set of data last Friday when the important Non-farm payrolls for July reported that just shy of one million jobs had been created. Employment gains were at the top of expectations, and unemployment levels are also falling while wages and the participation rate are increasing.

With Fed Governor Richard Waller suggesting recently that a gain of two million jobs over the next two months would be enough for the Federal Reserve to start tapering bond purchases, it came as no surprise that the dollar made gains after the figures were seen. This week sees further data released that will influence the Fed’s decision-making process starting this afternoon with the Job Opening survey (JOLTS) release.
Next up, we have July’s Consumer Price Index on Wednesday, expected to be 5.3%, and the July Producer Price Index on Thursday. With a dual mandate to deliver full employment and stable prices, any further inflationary pressures will encourage additional thoughts of tightening, leading to further dollar appreciation. We will also be watching the weekly jobless number on Thursday and keeping an ear open for speeches from members of the Fed.

Scandi

The Swedish krona was once again, rather unsurprisingly, rangebound within a narrow 0.20% range against most G10 currencies. This week may see some more volatility given the thin market and the macro data being released. We are particularly interested in the Service and Production figures released alongside the Industrial Order figures on Tuesday. Later in the week, more specifically on Friday, we will get the latest inflation figure. On a Year-On-Year basis, it is expected to be unchanged at 1.3%.

Unlike its neighbour, the Norwegian krone, which is not performing as well as most market participants predicted it to at the beginning of the year, has weakened steadily throughout the summer and reached levels against the EUR last seen in 2020. This week we will pay attention to the Industrial Production figures out today and the Inflation data on Tuesday. It is expected to have decreased to 1.1% from 1.4% on a Year-On-Year basis.

A busy week ahead

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Last week, the dollar put in its worst performance this year after the Federal Reserve meeting was perceived as less hawkish than analysts predicted. In actual fact, the Fed did say that “progress” was being made towards normalisation, but in a relatively quiet market, traders ignored the subtleties of language and decided to sell dollars.

The change in the market’s mood coincided with month-end, and institutions reversing their dollar positions to book their profits exaggerated the move down.
Along with most of the G10 currencies, the pound had its best week for some time and managed to gain nearly two cents to finish the month near the top of its trading range. The reluctance of the Fed to start tightening policy became more understandable after the release of second-quarter Gross Domestic Product showed that the economy was not bouncing back quite as strongly as was previously thought. Indeed, the annualised Core Personal Consumption expenditure, one of the Fed’s chosen indicators, was lower than the consensus had forecast, justifying the opinion that inflation is a product of disrupted supply chains and is transitory.

There are two significant events on the currency market’s horizon dominating traders’ thoughts and actions this week the monthly meeting of the Bank of England’s Monetary Policy Committee (MPC) and a complete set of US employment reports, including the all-encompassing Non-Farm Payroll this coming Friday. With the Federal Reserve taking a patient stance over monetary policy, neither dovish nor hawkish, it will be a major surprise if the BoE chooses a different path. The chances are that sterling will ignore the BoE meeting unless there is a marked change in tone and tread water until the release of the Non-Farm payroll data on Friday, which is expected to show strong growth. Away from the macroeconomic data releases, we will be monitoring the Brexit-related problems in Northern Ireland and the spread of Covid in the UK and, as importantly, across Europe and the US.

UK

With the direction of Covid figures still unclear in the UK, it is unlikely that the Bank of England will dramatically change tack on its policies after Thursday’s MPC meeting. Although there are at least two hawks on the committee, judging by recent speeches, it still appears too early in the UK’s economic recovery for a majority of members to push for any substantial change of policy. However, according to press reports over the weekend, they may alter the sequencing of any future tightening. Unless the Bank is openly more dovish than after its last meeting, it is unlikely that sterling will react too dramatically. The Bank of England is also scheduled to unveil its updated quarterly forecasts on Thursday, which are expected to continue cautiously optimistic, but they may contain a sharp upward revision to their inflation forecasts. Ahead of the meeting, Markit will release their Purchasing Managers Index (PMI) for Manufacturing this morning and on Wednesday final composite and Services (PMIs) for July.

Euro

A very quiet week and possibly month looks in prospect for the euro, with many traders choosing a sunbed over a dealing desk as August arrives. With the main events occurring away from the continent and little economic data to be published, the euro’s direction will be led by primarily the dollar. Despite a solid performance that saw the single currency gain a cent against the dollar last week, it slipped against sterling after mixed European data with concerns over the effect of the Delta variant remaining to concern investors. As in the rest of the world, the Eurozone will see the release of Markit’s PMI’s starting this morning with Manufacturing followed by the Services and Composite sectors on Wednesday, which also has June’s Retail Sales scheduled for release. There is then a lull till Friday when Germany’s Industrial Output for June is reported

US

After a series of mixed data reports in the US, traders will be studying this week’s employment details, particularly Friday’s non-farm payroll intently. With the Fed willing to turn a blind eye to inflation and reluctant to pull the trigger on tightening until further progress towards full employment is made, this monthly report has assumed more importance than usual. There are still six million fewer Americans in work than before the pandemic; however, the US has an enviable record in creating jobs. If the actual number comes close to the one million new jobs created figure that some are forecasting, the dollar will appreciate sharply as expectations of an early round of tightening will resurface. The US labor department will also release its weekly jobless total on Thursday, and ADP will publish its predominantly white-collar employment report on Wednesday. As elsewhere, we start the week with Markit and ISM’s Manufacturing PMI’s this afternoon. This data is followed by June’s Factory Orders tomorrow and further PMI’s, including July’s final Composite index the day after. There are several speakers from the Federal Reserve this week, including Richard Clarida on Wednesday and Christopher Waller the following day.

Scandi

The Swedish krona finished the month unchanged against most G10 currencies. August is historically speaking a krona positive month, and seasonality (with people coming back from their holiday and schools reopening) plays a part too. This week kicks off with the PMI Manufacturing data, Wednesday with the PMI Services data, and on Friday, the Budget Balance is reported.

Meanwhile in Norway, people are preparing for the General Election in September, and politics may start to influence the krone. August has a mixed track record for the krone, whose value very much depends on the consumption of oil and people traveling. This week sees no major data releases but for the PMI Manufacturing data out today.