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11th August 2021

Partner Insight: Currency Outlook August 2021

Looking Back to July

Bank of England Governor Bailey started July off saying that it was important not to ‘overreact to temporarily strong growth and inflation.’ This he explained would ‘ensure that the recovery is not undermined by premature tightening of monetary conditions.’ The US dollar was strengthening at the time as investors priced in news that the Federal Reserve intended to hike rates twice in 2023. Hence GBP declined against the USD on this combination. GBPEUR was also initially under pressure as the Eurozone upgraded its economic forecasts.

There was more negative sentiment towards the pound as GDP disappointed, growing only by 0.8% in May, rather than the 1.5% gain expected. Car production was one of the culprits as it fell by 16.5%. This decline was largely caused by a shortage of microchips. After this steady stream of negative news, the tide turned in favour of the pound. UK CPI grew by 2.5% and with the Bank of England adding that they expected inflation to peak at 3% this news did support the pound.

More importantly, nearing the end of the month, it was reported that the peak for COVID infections had passed in mid-July at around 50,000 cases per day with the mortality rate staying very low. This is very good news and was well received, as was the IMF report, which put the UK as the fastest growing advanced economy in 2021 with 7% GDP growth and second fastest for 2022 at 4.9%, only behind the US.

August Events, Opportunities and Risks

What a difference a month makes. Being first in the rush to try and safely re-open the economy was a nervous affair for the UK. As the world looked on, ‘Freedom Day’ on July 19th actually saw a surge in COVID infections and many analysts pointed to super-spreader events such as the Euros and Wimbledon as rash moves. However, the latest medical data from the University of Oxford the Oxford Martin School and the Global Data Change Lab now suggests the UK can continue to re-open. As long as a new vaccine-resistant COVID variant doesn’t appear, we can likely get back to adapting to the ‘new normal.’

There are possible storm clouds brewing in the shape of UK/EU talks over Northern Ireland and the end of the furlough scheme. However, we have to add that as long as the talks with the EU don’t descend into acrimony, and trade tariffs and businesses don’t get too much of a jolt from the end of the furlough scheme, the sky appears to be now quite clear for the UK. Latest figures reported by the BBC show 1.9 million people are still on furlough, the lowest level since the start of the pandemic and around 25% of the peak of 9 million furloughed workers. So, a smooth end to furlough is possible. The technical picture confirms this positive picture for GBP against USD. So long as the price doesn’t trade below 1.3570 it’s suggested that the price can likely target the February high above 1.4200.

Read the full report with the outlook for USD, EUR and RoW here

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