November 2021: Monthly Currency Report
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GBP – Great British Pound
UK welcomes French de-escalation
Brexit has been predicted to have a larger negative effect on the UK economy than the coronavirus Pandemic. While that may be true in terms of the length of time the economy will be affected, in terms of GDP contraction, it won’t be as significant.
That having been said, the supply issues that are concerning the MPC as it meets today, will continue far longer in the UK than they will in the EU for several reasons. The most obvious is the UK’s access, or lack of it, to the EU’s single market. That will be partially balanced by the wider scope that the UK has in sourcing raw materials and negotiating its own deals for their supply.
The petty wrangles that exist with France over fishing quotas and access to ports are slowly diminishing, but unless and until there is an agreement that both sides can adhere to these issues will continue to flare up.
The same is true of the Northern Ireland protocol, where both sides are playing a dangerous game, with the Good Friday Agreement continually in peril.
The members of the Monetary Policy Committee will be agonizing over how they will vote when considering whether short-term interest rates should be raised or not.
This decision along with the outcome of the FOMC in the U.S. will change the face of economies across the globe.
Analysts and commentators who have lived through periods of high inflation and the preparedness of Central; banks to act will know the danger of deliberately slowing the economy, particularly when growth is slowing as it is right now.
Central Banks act proactively and provide advance guidance of their intentions, provided their forecasts prove accurate. With 2022 growth still expected to be above average, it is hard not to favour a hike in rates this week.
However, the unpredictability of supply chains and fierce global competition for energy that has pushed the price of gas to unprecedented levels clouds that judgement.
The uncertainty has also manifested itself in the currency market. Were there greater certainty about a rate hike the pound would be far stronger particularly versus the euro, but yesterday it traded lower versus the single currency, falling to a low of 1.1745, before closing at 1.1759.
Against the dollar, the pound fell to a low of 1.3605, closing at 1.3612.
USD – United States Dollar
Is today the end of an era
The burden facing Jerome Powell and his colleagues on the FOMC over whether to begin to withdraw the additional liquidity they have been providing through asset purchases is, on the face of it, an easier call than that facing the MPC in the UK.
Powell has made it perfectly clear that the Fed is not even discussing a hike in interest rates since the economy is still in a precarious position due to the continued rise in Coronavirus infections and the issues with supply chains.
Janet Yellen made the point recently that the economy is still short of five million workers when compared to pre-Covid conditions. Even if there were to be a significant increase in new jobs created when the NFP data for October is released on Friday, it will take close to a year before the economy regains its pre-pandemic level of employment.
With inflation rising to levels that have been unprecedented in the last decade and no lack of liquidity affecting financial markets, the Fed’s decision should be a no-brainer, particularly given the level of guidance that Powell has provided, ably assisted by several colleagues from Regional Feds.
The level of U.S. imports has risen exponentially since the lockdowns were mostly lifted, however the level of goods arriving in ports, particularly in the west of the country has seen bottlenecks grow due to, not so much a shortage of trucks as the inability of trucking companies to deal with the huge influx.
It is impossible for national firms to redirect their trucks to the west coast because, while there is nothing like the backlogs being seen in the west, arrivals in other major ports are close to and in some cases exceeding capacity.
The dollar index has been toying with both sides of its current range over the past few weeks as traders have been reluctant to attach too much significance to today’s decision.
Yesterday, the index again rallied to a high of 94.13, but was unable to make inroads into selling interest on the approach to resistance at 94.20 and above.
It eventually closed close to that level, but tomorrow is another day. It could be that investors are just as likely to take profits on long positions even if the taper begins, should Powell be less than hawkish in his comments following the announcement.
EUR – Euro
Two years in, Lagarde still firefighting
The ECB will be overshadowed by the FOMC and MPC, together with the employment data that is due for release tomorrow and Friday. However, that is not true of the euro, which will be at the centre of any major move for the dollar index if the outcomes are at the outer edge of expectation.
Christine Lagarde has just celebrated two years as President of the ECB. During that time there have been several significant events that could have easily characterized her Presidency, but in truth she has spent so much time firefighting that her style of Presidency is yet to be fully realized.
It is likely that she would be less hawkish on inflation than the frugal five desire, even without the effects of the Pandemic. Her Draghi moment has already passed with her lower for longer commitment, but she hasn’t had the same impact as Draghi’s whatever it takes mantra.
She will hope that by the middle of next year she will be able to start work on the structural issues that were emerging pre-Pandemic, as well as reaching some compromise over what is a suitable level for budget deficits that will not continue to drive inflation higher.
It will be some time before debt to GDP ratios return to even the higher end of what is reasonable, but she could face difficulties convincing some nations that they will need to exercise restraint and even some austerity by cutting public services.
Although the ECB has received praise, particularly from the IMF, about how it has dealt with the issues created by Coronavirus, there is still a long way to go before the Eurozone can even consider a clean bill of health.
While manufacturing output remained strong last month, it was still constrained by supply bottlenecks. This is likely to constrain the entire developed world by more so the Eurozone where manufacturing makes up a larger share of total GDP than, say, the UK.
Yesterday, the euro fell below the significant 1.16 level versus a stronger dollar.
It fell to a low of 1.1575, closing at 1.1579.
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