The Pound was held back against other currencies in July as the spread of the coronavirus Delta variant increased. Previously, there had been hopes the opening of many parts of the UK economy on 19 July would have spurred the currency higher, while in fact this was not observed. Sterling displayed its risk-averse side, tracking lower as case numbers rose. At one point, the Pound hit a five-month low against the US Dollar, slipping to $1.36, but it soon recovered again, hitting a five-week high of $1.40.
It wasn’t just Covid cases holding back the Pound, fears over post-Brexit trade agreements once again resurfaced – this time it was the Northern Ireland Protocol that was worrying investors. The UK government unveiled a set of demands relating to trading arrangements with the EU for Northern Ireland, saying the border checks it had signed up to were proving to be unsustainable. The EU hit back, claiming the border checks were working as planned.
Meanwhile, Sterling was also hindered by the so-called ‘pingdemic’ affecting the UK economy. The NHS Test and Trace app, which alerts people to possible exposure to the virus based on their location, forced hundreds of thousands into self-isolation. This had ramifications throughout hospitality venues and supply chains as workers were forced to stay at home, causing numerous venues to close their doors. Industry bodies and the opposition Labour Party have called for an immediate resolution to the situation, saying the UK economy is losing millions of Pounds in trade for every day that the ‘pingdemic’ continues.
Rising incidences of the Delta coronavirus variant put the brakes on the government’s relaxing of restrictions, with many businesses and people choosing to continue with some of the rules. The nervous mood was emphasised by falling risk appetite, hindering the ability of the Pound to make much headway against the US Dollar and other currencies. Nevertheless, Sterling did manage to hold its ground against the Euro, and positively shone against the Australian Dollar, which was hammered lower on risk aversion.
On the economic data front, there was some positive figures in terms of retail sales, but the overall picture remained mixed, with PMIs showing turgid growth. Other hard economic data hinted at a stalled recovery and even the retails sales figures were deemed to have only improved on the back of the Euro 2020 football tournament, in which England reached the final.
Towards the end of July there was speculation that the Bank of England (BoE) was plotting a rate hike, which added some support to the Pound. Although interest rates are currently stuck at 0.1 percent, some commentators are expecting the BoE to use the recent last few days’ run of falling Covid-19 cases as a reason to think about increasing interest rates. Whether there is any truth in this or not could be revealed next week when the Bank next meets.
The cost of living hit a 13-high in the US, adding to pressure on the Federal Reserve to scale back stimulus measures and raise interest rates in order to cool an overheating economy. At the same time there was trouble on the stock markets, with the Dow Jones plunging more than 700 points on 19 July as concerns about the spread of the Delta variant took hold.
Increasing risk aversion wasn’t just limited to the US, a global move towards safe havens saw the US Dollar bolstered on FX markets, with the currency now sitting above 92 on the US Dollar Index. This, however, didn’t last for the whole month, and USD began to fall back again at the end of July after underwhelming economic data and some dovish remarks from the Fed caused USD appetite to evaporate. US Q2 GDP had been expected to expand by 8.5 percent on an annualised basis, but the print of 6.5 percent underlined how far to go the US economy still has before it recovers from the damage of 2020.
July saw the Euro slip on FX markets against many currencies, including the US Dollar, as surging cases of Covid-19 were observed across the European continent. Risk aversion continued to hold back the single currency even though there was some good news on the economic front as it was reported that Eurozone growth figures were better than expected. Nevertheless, the 2021 growth outlook as a whole was hit by the increase in Covid-19 cases, as well as more stringent travel restrictions holding back holidaymakers and business travellers.
The European Central Bank (ECB) released some new forward guidance in the form of inflation targets, which were upgraded to a rate of 2 percent. This caused markets to pause and consider whether the tapering of stimulus measures could be delayed further. Falling business confidence in Germany – the Eurozone’s largest national economy – set the mood for markets as supply bottlenecks and concerns over rising Covid-19 cases dented the outlook for the whole bloc.
Meanwhile, the row with the UK over post-Brexit trading arrangements could have contributed to the Euro’s weakness. A flare up in the disagreement threatens to dent EU-UK trade and hinder the growth prospects for both partners. But with most EU politicians heading off on holiday for the month of August the issue could be placed on the backburner until later in the year.
The Australian Dollar suffered greatly in July as a triple whammy of a stronger US Dollar, sliding risk appetite and concerns over new lockdown measures in Australia all served to undermine the currency. At present, lockdowns in the two main metropolises – Sydney and Melbourne – are curbing economic activity and hindering commerce. Reports of the Australian army being deployed and severe fines for people not wearing masks to enforce a ‘Zero Covid’ strategy have added to investors’ concerns about how sustainable the economic recovery will prove.
In slighter better news, the unemployment rate fell to 4.9 percent according to the latest figures. As the number of jobless is one of the key metrics used by the Reserve Bank of Australia to set policy, this was seen as a positive for AUD. Nevertheless, nothing could halt the slide in the currency as risk appetite slumped.
There will likely be more focus on the prognostications of the Bank of England over the coming month, with investors increasingly keen to know if and when a rate hike will be forthcoming. With inflation already above the BoE’s target of 2 percent, Sterling traders will be on the lookout for any signs that these price pressures are not as transitory as the bank claims them to be. In addition to BoE talk, Covid-19 infection rates will also be closely monitored, especially if cases begin to translate to higher rates of hospitalisations, which would no doubt hold back Sterling for another month.
In the Eurozone, August is likely to see markets looking for signs that the recent growth in the economy can be sustained and isn’t just a flash in the pan. This could become apparent at the start of the month when we get to see the first printing of the Q2 GDP figures. Given the Euro’s recent weakness, any good economic news is likely to see a rebound in value, with many analysts claiming the currency is currently undervalued. Nevertheless, August is usually a quiet month for the Euro, with many national parliaments closed for summer recess, meaning less likelihood of political volatility affecting the currency.
August could prove to be an active month for the US Dollar, with the Federal Reserve hosting a ‘summer camp’ symposium of central bankers in Jackson Hole, Wyoming. The event is often used as a launch pad for policy declarations, and markets are somewhat expecting there to be a hawkish announcement about tapering of QE and other stimulus measures. If this were to happen, we can expect to the US Dollar jump in value, the assumption being that tapering QE is the forerunner to an interest rate hike. At the same time, nervous economic analysts will be keeping an eye on the latest inflation figures after June’s blowout 5.4 percent jump in the cost of living. Uncontrolled inflation has the potential to undermine US economic recovery and put a halt to the Fed’s (potential) tapering plans.
Meanwhile, Australian Dollar traders will be watching the Reserve Bank of Australia for signs that it is becoming less dovish. In July, the bank tapered some of its stimulus measures relating to bond purchases, although this didn’t help the ‘Aussie’ which slid on the FX markets. The introduction of more severe lockdowns in Australia – notably in Sydney and Melbourne - are worrying analysts who expect the economic hit to the country’s finances to be severe. With the Australian Dollar already at an eight-month low against the US Dollar, traders are wondering when – and even if – a rebound might occur. As ever, AUD tracks global risk appetite, so the longer the several variants of the coronavirus are spreading, the longer it seems AUD will remain suppressed.
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