The British pound found its feet and started to regain some strength

The last week is one in which the British pound found its feet and started to regain some strength. UK GDP data showed the economy grew a better-than-forecast 6.9% in the last year. That is slightly lower than last month’s 7.5% but still a healthy growth rate. That data was accompanied by Industrial production which was up 3.7% on the year and manufacturing production, which also rose; up 4.1% in the same period. However, one concern is that UK inflation remains high and, while certain sections of the economy are doing rather well, UK PLC is not out of the woods yet.

Last Tuesday saw the release of a very healthy UK jobs report. The ending of the furlough period and the reopening of the catering and entertainment sectors helped to create 207,000 jobs in the month of September. That bought the unemployment rate down to 4.5%. Also, a report from Santander shows 73% of UK businesses are confident about their growth prospects. That’s so good to see. Sterling is also benefiting from the weaker US dollar. The GBPUSD rate was up to $1.38 on Tuesday afternoon. The Pound also remains strong against the Euro. That pair is holding station at €1.1850, just above the previous ceiling of €1.800 but not yet attempting to reach €1.20. The big events in the week ahead include UK retail sales and inflation numbers plus heaps of central bank speakers. That ought to keep traders busy.

GBPAUD a little mixed

The dilemma of the central banker was voiced quite openly by the Reserve Bank of Australia on Tuesday morning. The minutes from their last meeting show the balancing act between understanding that the property market is becoming overheated due to an extended period of record-low interest rates whilst accepting that, to raise rates would be damaging to the overall economy. Central bankers dance along this fine line at the best of times but these are very unusual circumstances and the margins for error are finer than normal. A very upbeat business sentiment index was counterbalanced by a poor consumer index last week. So it is perhaps not surprising that the GBPAUD exchange rate is a little mixed.

The current range is roughly between AUD1.82 and AUD 1.8750 and, at the time of writing, this pair is poised in the middle of that path at AUD1.84. We lack Aussie data this week but the UK releases should ease this pair higher. However, next week will deliver Australian consumer price inflation and retail sales data to keep things lively.

CAD only makes marginal gains despite Sterling’s advances

GBPCAD has spent the last week heading lower despite Sterling’s advances elsewhere. Rising commodity prices have helped, despite China’s slowing growth and supply chain problems that are affecting most economies. Nevertheless, the Bank of Canada’s business outlook indictor delivered the highest level of optimism on record in Q3 despite the aforementioned concerns. The survey revealed that many businesses expected those constraints to continue through the first half of 2022. That is a sentiment mirrored in other countries.

So, whilst this is great news for Canada, the Canadian Dollar only made marginal gains and GBPCAD is anchored to CAD 1.70; the lower end if its range for the last year. There is very little chance the Bank of Canada will move the base rate up from 0.25% when they meet next week but this week’s inflation and retail sales data may change that perception.

Reserve Bank of New Zealand expected to raise base rate

The big mover of the last few days has been the New Zealand Dollar. GBPNZD is down to just above NZD 1.93 as at Tuesday morning after a 3.5 cent drop in just 6 days. This rate hasn’t been so low since 10th May. Seeing New Zealand’s consumer price inflation rise by 2.2% in the year to September; the fastest pace in 10 years, took a day to sink in but when traders twigged the news, the NZD gained strength across the board.

The main reason for the strength is that many now believe the Reserve Bank of New Zealand will raise their base rate by 50 basis points before the end of the year. That may be just wishful thinking because the repercussions of an unexpected bout of delta variant covid in NZ may have damped the chances of that. Ultimately, 2.2% inflation is generally the target rate for most central banks, so it is unlikely, in my opinion, that it will cause any kind of knee-jerk reaction in the halls of the RBNZ. We lack much data from NZ this week, so the GBPNZD will tend to react to the UK data and that of China and Australia; new Zealand’s major export destinations.

Tighter monetary policy in the US may well see the USD weaken

The US Federal reserve’s bond buying and interest rate policies are dominating the US Dollar right now. It seems pretty certain the Fed will slow (or ‘taper’ to use the common parlance), their bond buying program before the end of the year. How sever the cut to the program will be and over what time frame is the general discussion. And when they do that, what kind of a pre-emptor is it to higher interest rates?

That is question 2. Logically, these kinds of tighter monetary policy ought to strengthen the USD but, as the rest of the world is also emerging from the ravages of covid, investors, who has stored their money in the safe arms of Uncle Sam, are venturing out into other assets. So, perversely, tighter monetary policy in the US may well see the USD weaken. We are seeing some of that right now, with GBPUSD up to $1.38 and EURUSD consolidating around $1.1650. We only have housing market data from the US this week but Q3 economic growth data will be released next week and that will shift the USD hither and thither ahead of and after Thursday.

Euro weaker against most other currencies

Tuesday saw a rash of European Central Bank members making speeches along with a member of the Bundesbank council. We’ve lacked hard data from the eurozone for most of the last 7 days. In fact, the most commonly heard phrase with regards to the Eurozone has been related to supply chain issues. German manufacturing has suffered and Eurozone new car registrations suffered their worst September since 1995.

Hence, as reported above, the euro is weaker against most other currencies, including the Pound. GBPEUR is holding well above €1.18 and may even press ahead to test the psychological barrier at €1.20. The weaker US dollar does come into play though in the EURUSD rate. This pair has gained 3/4 of a cent since Monday and started Tuesday at $1.1650. The end of this week is overshadowed by an EU leaders summit but we get back to normality on Monday with the German Ifo institute’s business climate survey which is always influential.

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