Currency Market Analysis


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Sep 07, 2021 | Currency Market Analysis

Global Themes

Ongoing stimulus to support sentiment

• Lack of volatility persists
• Sterling mixed, sentiment driven
• RBA tapers but Aussie drops

Delivered by George Vessey

Volatility

Lack of volatility persists

The British pound has traded in a tight trading range against the euro for the past six trading days – oscillating between €1.1620 and €1.1680. The lack of recent volatility is synonymous with most of 2021 for this currency pair but it remains circa 4% higher year-to-date.

After another tepid day of trading on Monday, GBP/EUR continues to float about without any meaningful direction, but key risk events loom this month, including the European Central Bank (ECB) meeting this week and the Bank of England, and US Federal Reserve (Fed) later this month along with the German elections. Volatility has the potential to ramp up in September, especially if central banks do start to taper monetary support. The upside risk is a weekly close above €1.18, which would likely trigger a move towards €1.20, but the short-term downside risk is a slide towards €1.1450, especially if the ECB is hawkish on Thursday and talks up inflation risks on the continent.

• Meanwhile, data this morning revealed German industrial output recovered in July, following yesterday’s news that factory orders increased by 3.4% - a new record, slightly supporting EUR sentiment whilst European equity markets hit an all-time high yesterday but are mixed this morning.

British pound

Sterling mixed, sentiment driven

Sterling remains at the mercy of global risk sentiment, which continues to flip between risk on and risk off amid ongoing Covid-19 developments, the global growth outlook and monetary policy adjustments. GBP/USD lost its upward momentum yesterday, slipping from 1-month highs, but is still above a key resistance level that was overturned last week.

The weaker-than-expected US jobs report last Friday cooled investors’ expectations of the Fed scaling back economic stimulus, which in turn boosted risk appetite, hurting the dollar and strengthening demand for risk-prone assets, which often includes the pound. Meanwhile, data from the UK on Monday highlighted ongoing supply chain issues are haunting the construction sector with firms warning the cost of materials was rising at among the fastest rates since the 1990s. Moreover, UK car sales fell to their lowest August total since 2013, as the global shortage of semiconductors continued to hurt production.

• GBP/USD could easily slip back towards $1.37 in the short-term but rebound on towards $1.40 this autumn as long as global risk appetite is buttressed by central banks’ stimulus and is not tainted by the rising Covid-19 cases causing potential lockdowns again.

AUD

RBA tapers but Aussie drops

The Reserve Bank of Australia (RBA) decided to trim its bond buying programme in the early hours of this morning. In a knee-jerk reaction the Aussie dollar strengthened but soon gave up those gains following a dovish concession by the RBA - the stimulus programme would be extended.

The RBA left its cash rate at 0.1% - a record low – and reiterated its need to see sustainably higher inflation before raising interest rates. All eyes were on bond buying though, and the tapering confirmation was watered down by the extension, making it a less hawkish meeting, and sending the Australian dollar lower. After its biggest 2-week loss of the year, GBP/AUD rebounded from a 7-week low and has reclaimed A$1.86 this morning.

• The Aussie remains under pressure despite strong trade data from China (its key trading partner) revealing a 25.6% rebound in Chinese exports last month thanks to solid global demand.

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