Monthly Update: July 2021
“A nervous sentiment has dominated global currency markets this month: the raging delta variant, together with supply chain shortages, has put brakes on the reflation trade. Market participants are far less certain about the global recovery and have been unwinding bets on riskier currencies. US inflation has been rising above expectations, and the Federal Reserve has been signalling a readiness to address it, leading some to predict that tapering plans will emerge in August or September. This mixture of growth and uncertainty has been characteristic of this summer, and it is unlikely that this will change in August. Meanwhile, the biannual survey of ForEx turnover in London showed that currency trading volumes reached a record high in April 2021, with an average daily turnover of $3 trillion.”
Sam Cornford, Partner & Head of Trading
The Biden Administration ended the month on a low with Delta variant cases rising across the USA and the extension of a travel ban on the UK, EU and China. The passage of the administration’s Infrastructure Bill through Congress has frequently hit headlines throughout July, with the $1.2 trillion deal, focused on “human infrastructure”, prompting heated debate between Democrats and Republicans. While at the start of the month, the economy was looking healthier, Covid-19 has dampened economic optimism in the past month. The pace of inflation was up consistently above 2% and the CPI was up to 5.4%. Fed Chair Jerome Powell sought to reassure, indicating that monetary policy would be tightened if needed. Elsewhere, the US and Western allies formally accused China for March’s Microsoft Exchange hack and the Justice Department unsealed an indictment against Chinese Ministry of State Security affiliates for a hacking campaign dating back to 2011. Both illustrate growing tensions with Beijing, underpinned by a more robust US foreign policy.
In the UK, “Freedom Day” progressed on the 19 July, removing the majority of pandemic restrictions on social contact, opening nightclubs, and removing masks as a legal requirement. The ‘Pingdemic’ captured headlines as the Delta variant caused 600,000 UK citizens a week to have to self-isolate from July 14 to July 21, with critical sectors in the economy experiencing staff shortages as a result. Rapidly falling cases over the last week have surprised scientific advisors to the Government. At the start of July, the Government secured an exemption for financial services firms operating in the City of London to a minimum 15% corporation tax, supported by the OECD and Biden Administration. Divisions between Brussels and Westminster reared their head again this month, as the Treasury and the EU failed to reach a consensus on post-Brexit arrears as each side’s economists estimated figures of £35bn and £40.8bn respectively for the divorce settlement. Elsewhere, high inflation caused concern for the Bank of England, who warned that monetary policy may need to tighten in 2022 if it continues to surge to a figure of 4% across a twelve-month interval.
Sterling is higher than that it was a month ago against most major currencies. June trading left the pound in a weak spot against the dollar, as the fast spread of Delta variant cast doubts over the possibility of the full reopening planned for 19 July. The Government’s approach of “learning to live” with Covid-19 received a warm welcome in the markets, making the pound one of the best performing G10 currencies of early July. Weaker-than-expected GDP growth, tensions over the Northern Irish protocol and new headaches over the divorce bill with the EU weighed on the pound. After a brief upward swing on hot inflation figures, the pound plummeted against most majors towards “Freedom Day” amid risk averse global trading, hitting five-months lows against the dollar. Pound forecasts saw rapid changes at the end of the month, as it has recovered some losses amid a fall in Covid-19 cases and positive retail sales data, almost reaching a four-month high against the euro.
The euro is lower against the pound and unchanged against the dollar compared to the end of last month. The ECB monetary authority reviewed its 18-month strategy in the beginning of July and set a new inflation target at 2%, with room to overshoot, which supported the euro. The single currency also benefitted from some hedge funds unwinding risky positions against other majors. Christine Lagarde capped any further gains in the middle of the month by articulating a dovish change in forward guidance, and by mid-June the euro was in choppy waters, slipping to a five-month low against the Swiss franc. The dovish strategic pivot, at a time when many peers were considering cutting stimulus, was followed by a pledge to keep interest rates at record lows for longer, sending the euro further down. At the end of the month, a survey of German businesses highlighted concerns around supply in both industry and retail, resulting in a volatile euro.
The dollar is weaker versus the pound and unchanged versus the euro in comparison to the first of July. Following its best month since November 2016, the dollar continued its growth, reaching three-month-highs when the hawkish Federal Reserve confirmed its intention to taper asset purchases as soon as this year. Mixed signals from the labour market resulted in intermittent softness, but the greenback jumped against a basket of other majors when US consumer prices rose by the most in 13 years, spurring the bets of faster monetary policy tightening. Jerome Powell insisted that he won’t rush to curb policy support, which did not stop market participants from seeking the greenback’s safety during the worldwide surge in infections. The month-long steady growth of the dollar was interrupted by a dovish press conference after the FOMC meeting, but strong corporate results offer hopes of a speedy recovery.
What to look out for
- 4 August EU Retail Sales YoY
- 5 August Bank of England Interest Rate Decision
- 8 August End of Summer Olympic Games 2021
- 11 August USD Inflation Rate YoY
- 17 August US Retail Sales MoM
- 17 August US FOMC Minutes
- 17 August EEA GDP Growth Rate YoY
- 18 August GBP Inflation Rate YoY
- 18 August EEA Inflation Rate YoY
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