Eurozone recovery should bring early monetary tightening

Many mixed messages are coming out of U.S. data. Dow Jones indices fell yesterday. Concerns over the expansion of the delta variant is a significant factor in that. However a survey released by the New York Federal Reserve shows the pressure on wages being bought by workers who are more readily switching jobs and demanding higher wages as the economy starts to recover. Add in the fact that James Bullard of the St Louis Federal Reserve said yesterday that the tightening of US monetary policy would commence by the early part of 2022, and it’s no surprise that the US dollar has benefited from that green-shoot optimism. The GBPUSD exchange rate is down to 1.3760 this morning and EURUSD is down to 1.1830.

Yesterday was notable for the improvement in eurozone economic growth. The GDP figures for quarter 2 showed 2.2% quarterly growth and that bought the annual rate up to 14.3%. Both figures were stronger than expected and that boosted the euro across the board. GBPEUR shot down to 1.1610 at one point and it’s only marginally recovered to 1.1630 this morning. Traders will now be poised ahead of tomorrow’s European Central Bank meeting. Whilst the ECB is unlikely to make any change to their base rates, there is every chance they will commence monetary tightening manoeuvres ahead of most other central banks. If there is any hint of that in the statement that the ECB releases or within their press conference, we should be prepared for euro strength.

Strong bounce in Japanese economy

We also saw a nice bounce in Japanese economic activity in quarter two. GDP growth of nought .5% on the quarter bought the annualised rate up to 1.9%. That’s a sharp rise compared to the Q1 figure of minus 3.7%. As that recovery was so widely forecast, we saw very little reaction in the value of the Japanese yen. GBPJPY is stable and 152 yen to the pound very strange but the recovery of the US dollar has caused a rise in the USDJPY exchange rate from 109.7 two days ago 110.44 this morning.

Bank of Canada – on hold but when will change come?

Another central bank is in action today. The Bank of Canada will almost certainly announce that they are making no change to their interest rates at this meeting. However, the statement that accompanies there nought 0.25% base rate, should also include comments on the pace and timing of their monetary tightening. It isn’t certain what time their press conference will be held but the Canadian dollar is likely to be volatile around that time, 4:00 PM-ish in the UK. The GBPCAD rate start today at 1.7420. Although this pair has been volatile overnight, this level is the middle of yesterday’s range.

This afternoon’s U S data is limited but we will see the release of the federal reserve’s Beige Book this evening. It’s blandly titled but quite an incisive look at the regions within the US. A report this morning showed that 95% of US counties are reporting rises in covid infections. It will be interesting to see if that’s reflected in the Federal Reserve’s anecdotal reports. The other piece of news from the US of A is their crude oil inventories.

AUD and NZD knocked by USD rebound

The bounce in the US dollar has had repercussions for the Australian and New Zealand dollars. Both are weaker this morning. The GBPAUD exchange rate is up to 1.8675 and the GBPNZD exchange rate is pushing 1.94. Both are healthy bounces and respite for those who need to buy Australasian dollars and have grimly watched the rate move against them for the last few weeks.

And I can’t be the only one who’s annoyed by the press corps surprise that a government which has been working to a ‘Spend Spend Spend’ mantra, a la Viv Nicholson, for the last 18 months is finally having to begin raising taxes to recover the enormous debt. No one likes higher taxes but these moves are just the start of an inevitable process. I find this faux shock by the press just a little insulting.

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