27 April 2021: Sterling on the front foot

Sterling on the front foot

27th April: Highlights

  • Forecasters too pessimistic
  • Is the dollar finding a base or are sellers looking for a better level?
  • Euro gains close to 3% so far in April

Pound set stand against any dollar rally

It is becoming clear that forecasters may have underestimated the pace at which the UK economy is recovering from the Covid-19 Pandemic.

As data continues to be released for Q1, it shows that the recovery actually began when Prime Minister Boris Johnson announced his Roadmap setting out the stages at which the country would return to normal.

Businesses began to hire or re-hire staff in anticipation of a surge in activity while the public began to see the light at the end of the tunnel.

While Q1 GDP growth will be negligible, the continued increases being made to 2021 estimates has its roots in an underrating of the pent-up demand and the eagerness of the country to return to normal.

Fundamentals for the UK economy have turned positive with leading indicators improving every month.

An agreement over the Northern Ireland protocol, a Central Bank that is beginning to believe that the recovery will be solid, and the continued success of the vaccination rollout means that the UK economy has stolen a march on its global competitors.

Eighteen months ago, no one could have predicted that the UK economy would grow at a faster rate this year than Germany.

The Government still finds itself to extricate itself from accusations of incompetence and sleaze. Historically, any Party that has a majority of this size will face such mudslinging as opposition Parties are well aware of their impotence in challenging on genuine issues.

The pound remains caught up in a new web of drivers for the currency market. The old strong economy, strong currency mantra no longer exists with several undercurrents compete for investors and traders attention.

Yesterday, the pound rose to a high of 1.3929 versus the dollar but no one believes that the pound will convincingly break through the 1.40 barrier yet and it fell back as profits were taken on intraday positions to close at 1.3897.

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Or is it just seasonal volatility?

Durable Goods Orders, the value of orders for big ticket items like ships or airplanes is one of the more volatile and unpredictable pieces of data that is released monthly in the U.S.

This is because every order carries such a large portion of the total making accurate estimates almost impossible.

Despite this, the market still uses the data as a leading indicator of future investment, employment and even inflation.

There is no more accurate single advance indicator of the strength of the economy than the order books of the larger industrial or manufacturing businesses.

Boeing remains one of the largest employers across its entire supply chain so every order it receives, which often exceed a billion dollars each, counts.

Orders for big-ticket items rose by 0.5% in March. This was well below market expectations for a rise of 2.5% and raised questions about the medium-term strength of the recovery.

Members of the FOMC will have noted this piece of data as they convene for their regular monetary policy meeting today.

Since there is no way there will be any change in official interest rates or the bond buying programme, analysts will be searching comments made by FOMC members for any clue as to their future expectations.

Jerome Powell has made it abundantly clear that the committee believes itself to be on top of any rise in inflation, but a sceptical market requires more than just words in order to be as relaxed as the Central Bank concerning the effect of ultra-easy monetary policy.

Since the last meeting, Powell has acknowledged the market’s concerns about the Fed’s ability to deal with a rapid rise in inflation. He has also commented that he will not allow inflation to rise too far above its 2% target and any rise will be temporary.

Expectations remain that he will need to add some flesh to the bones this week in order for his credibility to remain high.

Yesterday, the dollar index flattered to deceive, rallying above the 91 level but fell back to close lower on the day at 90.83, its lowest since the first week of March.

Although business confidence misses estimate

Germany remains head and shoulders above its neighbours in the European Union in terms of the pace of its recovery from the Pandemic. It remains committed to its role within the alliance but proves time and again that it remains unable to fully endorse the natural progression towards a more Federal Union.

The most basic role of any Government is to guarantee as far as it can, the living standards of its people. While the Pandemic has brought into clear focus the inability of the EU Commission, despite having a German President, to drive either policy or the current direction of the economy. This means that Germany is stronger as it is.

This is nothing new, as the EU has morphed from a trading bloc, through a political union into what it is today, a mishmash of grand dreams mixed with painful realities, it requires strong leaders with diplomatic and statesmanlike qualities to drive it forward.

While Berlin finds itself unable to fully subscribe to the ideals of a single, united Europe, any dream of a closer Union will fail.

The German Government is expected to raise its estimate for GDP growth in 2021 to 3.5% from the previous assessment of 3%.

The reason for this rise is an unexpected improvement in the fourth quarter of last year. This also sets the country apart from its neighbours who were suffering from lockdowns, surviving on handouts from Brussels.

The current strength of the single currency that has been manufactured by the Federal Reserve has allowed the ECB to be less concerned about inflation than it otherwise would have been.

Despite this lack of control over its own destiny, members of the ECB Governing Council still believe that price rises will remain below expectation given the level of monetary support the Central Bank provides.

The euro continues to defy the logic of relative economic strength. Yesterday, it Rose to a high of 1.2116, but fell back to close at 1.2085.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”