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With currency markets being down on the UK pound amid post-transition concerns, the weak US$ last week caused a wave of short covering that took Sterling through its post lockdown high just above $1.28 and on past the $1.30 level.
This had the effect of wiping out losses caused by the tidal wave of safe haven US$-buying seen at the start of the Covid-19 pandemic.
Pressure points
The US$ remained under pressure, weighed down by the rising number of Covid-19 infections in the States, a resurgent Euro after the bloc agreed to jointly issue debt to fund the region’s recovery programme, on top of ongoing US-Chinese tensions.
The unlimited quantitative easing programme by the US Federal Reserve is also a major factor behind US$ weakness and after opening week around the 94 level, the DXY (US Dollar Index, which measures the value of the US$ against other currencies) dipped to 92.55 – its lowest point since May 2018 – before recovering back to the mid 93s.
US interest rates steady
The Federal Reserve held US interest rates steady last week, but markets were hoping for some additional measures to support the economy. However, Fed chairman Jerome Powell struck a dovish tone in last week’s post-Federal Open Market Committee (FOMC) meeting press conference, adding to the pressure on the dollar.
For now at least, the US$ is expected to remain very much unloved in the FX world. Sterling, on the other hand, has benefitted from the view that perhaps Brexit negotiations are not necessarily at the impasse that investors had previously thought.
Sterling bounce
Markets are now more hopeful of at least a basic UK-EU trade deal and talks are now scheduled to continue until early October, with an announcement possible after the EU leaders meeting later that month.
On the back of this, Sterling last week broke through the topside of its recent range at US$1.28, causing a surge of stop-loss buying that took it through the psychological $1.30 mark.
This meant Sterling hit its best level (at around 1.3165) since the pandemic-inspired plunge in early March, before easing back slightly over the weekend, though it remains above 1.30.
Sterling strengthened against the Euro, taking the rate from as low as 1.0930 back to the low 1.11s where we open this week.
Potential sterling volatility
The Bank of England meets this week to discuss any change to monetary policy, and though markets aren’t expecting any movement on rates, the post-meeting press conference by BoE governor Andrew Bailey will be closely watched for any mention of negative interest rates and/or any change to the quantitative easing programme.
With market opinion divided on whether the nascent improvement in economic data could lead to a reduction in money printing, or if the overall conditions still require an expansion of the programme, we could see a spike in Sterling volatility around these announcements on Thursday.
Shares
Stock markets were under pressure after GDP numbers from the US, Germany and EU weighed on sentiment, with all reporting historically sharp contractions. Even though the US number managed to beat expectations, the quarter-on-quarter figure of -32.9% was significantly worse than its peers, with these numbers ultimately outweighing Covid-19 vaccine hopes that had seen equities rallying.
Gold
Gold continued to be in demand due to a number of factors, including its safe haven status, the weak USD and its wealth preservation qualities, and it hit a new record high against the USD at just below 1,988 per ounce over the weekend and remains near that level as we open this week.
Oil
Oil was slightly off its recent levels, undermined by the growing Covid-19 infections numbers and the corresponding potential hit to demand, finishing the week hovering around the $40-per-barrel level.
Economic data: this week’s highlights
Monday 3 August
Manufacturing PMIs in Europe and the US
Tuesday
Eurozone PPI
US Factory orders and weekly API oil stocks
Wednesday
Eurozone and US composite and services PMIs
German Retail sales
US ADP employment change and trade balance
Thursday
Bank of England monetary policy announcement and Governor Bailey press conference
UK Construction PMI
US weekly initial jobless claims
Friday
German Industrial production and trade balance
US employment report