Since the latest lockdown began to contain Covid-19 infections and hospitalisations, the market has kept a close eye on the route out of the lockdown. It could have been presumed therefore that the rising rhetoric against the latest and most final step out of the social and economic restrictions could call high water on the rising GBP tide. Sterling held its value on a trade weighted basis and yesterday stood strong on its major crosses. It is the economic data including strong growth and inflation data as well as a stable labour market that is supporting GBP whilst the UK navigates the last stages of its recovery plan. A stark reminder of the challenges that remain between the post-Brexit United Kingdom and European Union during the G-7 summit also failed to weigh on GBP.
With the economy still on secure ground, the market remains confident in GBP despite the setback that concerns over the Delta variant could otherwise have. This week, strong expectations for both labour market and price level data are priced into GBP already with appetising data critical for sustained GBP strength. Today, month on month employment data will be released in a good opportunity to gauge the labour market’s health ahead of the curtailment of the furlough program. June will mark the end of the closure of the scheme to new employees in the first major curtailment of the accessibility of the wage cost support program. As the tapering of wage support continues in the months of August, September and October, markets will keep a close eye on the health of the labour market moving into this period.
On Wednesday Inflation data will be published following a strong April reading. The inflation (and core inflation) rate is expected to continue to rise reflecting not only base effects created by the year on year comparison but also reflecting the price pressures created by the effervescence of the UK’s economy. A strong out-performance will add momentum to the GBP longs inspired by the changing bias of the Bank of England towards policy normalisation in the face of a recovering economy. These data come at a time when markets have added to an already long positioning in GBP that now stands at 16% of open interest.
Once again implied and realised volatility have continued to fall in the market. Today and tomorrow’s trading sessions should see the market tread water ahead of a key Federal Reserve Bank decision due on Wednesday evening. This meeting will provide direction for the foreign exchange market for weeks and months to come as the markets analyse how the Federal Reserve will respond to rising price pressures in a high-growth environment.
Discussion and Analysis by Charles Porter