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Forex Market Analysis

May 05, 2021 | Currency Market Analysis

Global Themes

Dollar strong amidst safe haven demand

• Risk wavers amidst supply chain-and inflation woes
• Pound calm ahead of BOE tomorrow
• GBP/EUR up nearly 1% this month

Risk

Risk wavers amidst supply chain-and inflation woes

Risk appetite was quashed at the start of the week, sparking demand for safe haven assets, most notably the US dollar which is also stronger versus the traditional safe haven Japanese yen. Supply-chain and inflation issues appear to be the predominant factors fuelling risk aversion.

US manufacturing data earlier this week revealed activity grew at a slower pace in April – increasing concerns about bottlenecks and prices pressures due to shortages of inputs and pent-up demand. The semiconductor microchip shortage is forcing production lines to halt once again, most evidently in the auto industry and technology companies. Amidst no sign of supply catching up or demand cooling down, prices are expected to continue rising across value chains.

• Today, market participants will be keeping a close eye on the ISM non-manufacturing report and the ADP private payrolls this afternoon, ahead of Friday’s pivotal US jobs report.

BOE

Pound calm ahead of BOE tomorrow

The British Pound could rally higher this week if the Bank of England (BOE) signals it is ready to start reducing its bond buying programme at its monetary policy announcement tomorrow. The central bank will also provide updated growth and inflation forecasts – both of which are expected to be revised higher, which again could support GBP demand.

GBP/USD continues to float around the $1.39 handle whilst GBP/EUR is creeping towards the €1.16 mark this morning. Broad-based US dollar strength is weighing heavily on EUR/USD, which has consequently buttressed the pound’s rise against the euro. A hawkish BOE on Thursday afternoon, could send sterling higher across the board with $1.40 on the radar for bullish GBP/USD traders. The Scottish parliament election also takes place tomorrow though, which may limit sterling’s potential upside in the short term if pro-independence parties gain a substantial majority.

• Back in 2014, when the last Scottish independence referendum took place, sterling slumped around six cents in the month of the vote, but in the build-up prior – the political risk was largely ignored. For this reason, upside risks might indeed outweigh downside risks in the short term for the pound.

GBP/EUR

GBP/EUR up nearly 1% this month

Sterling is rebounding against the euro this month following its first monthly decline in seven months. GBP/EUR is lining up for a very strong weekly appreciation after basing just under the €1.15 mark for the past three weeks. Is €1.17-€1.18 on the cards again in May?

The euro had a strong April thanks to Europe’s vaccination campaign speeding up and the economic horizon appearing more promising thanks to businesses and consumers adapting to lockdown measures. Due to the pent-up demand being unleashed, Eurozone manufacturing growth hit a record high last month and manufacturers are at their most optimistic in nearly nine years. Still, data showed the bloc entered a double-dip recession in the first quarter, which weighed on the common currency.

• GBP/EUR could trend back towards the €1.17 mark if the growth rate differential between the UK and Europe widens. The UK’s easing of restrictions remains on track and UK growth forecasts are widely being upgraded, which is supporting sterling’s nearly 1% appreciation versus the euro already this month.


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