Don't mention the 'I' word: No hints of UK tightening to head off inflation or economic overheating

Mon 28 Jun 2021
Posted by: Noelle McElhatton
Trade News
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UK pound

Following recent news from the US Federal Reserve that two interest rates rises were to be expected in 2023 and discussions were starting on the tapering of bond purchases, the pound fell against the dollar to lows of around US$1.38.

At the beginning of last week there was a correction and the pound strengthened gradually to weekly highs of US$1.40.

The pound also made small gains on the euro, rising from €1.163 at the open on Monday to a weekly high of €1.172 on Wednesday (23 June).

The markets expected that the Bank of England’s meeting minutes on Thursday (24 June) would echo the US with a mention of inflation, possible interest rate rises and a discussion about the lowering of bond purchases.

However, traders were disappointed at no hints of tightening to head off inflation or overheating in the economy. The BoE’s MPC voted 8 to 1 to keep bond buying unchanged at £895 billion and 9-to-0 to keep interest rates at 0.1%.

Euro

The pound fell versus the euro from €1.171 to €1.164 and against the dollar from $1.399 to $1.389 on Thursday.

Oil

Prices surged last week to a high point of just under $74 per barrel – the highest level since October 2018, in anticipation of travel starting to reopen. The Bank of America has predicted prices rising towards $100 in 2022.

Gold

Gold traded sideways for the week and closed on Friday at $1,780 per ounce.

Stock markets

Stocks rose over the week with the Dow Jones up from 33,200 to a new record 34,500 and the FTSE 100 from just under 7,000 to 7,145.

The markets seem to be fully adjusted to the recent message by the Federal Reserve and have already priced in the strong economic bounce on both sides of the Atlantic.

Covid high alert

This week the market will be focusing on UK pandemic infection figures, with over 18,000 Covid cases per day being reported. Attention also turns to Europe as the Delta variant spreads to the Continent. 

German chancellor Angela Merkel has warned that Europe is “on thin ice” as EU health officials said the Delta variant would account for 90% of the bloc’s cases by late August.

Japanese PM Suga said that his government is on high alert as Tokyo cases rise and Australia has tightened restrictions.

Some value may be added to the pound after health minister Matt Hancock’s resignation – his successor, former chancellor Sajid Javid, is said to have more liberal views concerning Covid restrictions and the UK remains on track for reopening on 19 July. Easing tensions over the Northern Ireland Protocol should also offer support to sterling.

Week ahead

Tuesday 29 June

  • UK consumer credit and mortgage approvals
  • Euro-zone consumer confidence
  • German CPI

Wednesday 30 June

  • UK GDP growth rate
  • Euro-zone inflation (CPI)

Thursday 1 July

  • German retail sales
  • UK PMI data for manufacturing
  • Euro-zone unemployment rate

Friday 2 July

  • Euro-zone PPI data
  • US average earnings
  • US non–farm payrolls
  • US trade balance