The pound starts the week in fighting form, remaining more or less at the two-and-a-half-month high it reached on Friday.
The pound-to-euro exchange rate has barely moved for a month now. Staying on a plateau like this is relatively rare, and reflects two uncertainties facing the currency markets right now. Firstly, whether the pandemic is really nearly over, and secondly whether inflation is getting out of hand. It could go either way over the summer.
On Covid, all the talk recently has been about whether the possible four-week delay to the end of Covid restrictions – scheduled for next Monday – will be announced today. The general expectation was that this could hurt the pound. However, given that the delay to lockdowns last March and December are widely regarded as having been disastrous, it is possible that the markets would welcome a more cautious approach.
An even bigger, longer-term debate in economic circles is around inflation. Economists fall into one camp that says that the stimulus measures put into the economy are stoking inflation, potentially disastrously. Inflation hit 5% in the US last week, well beyond the 2% previously believed acceptable.
However, most central bankers believe this inflation is temporary and a price worth paying to get economies rebounding quickly.
Why does that matter? Mainly because if more data emerges that the economy is running too fast and inflation getting out of hand, interest rates will have to rise to combat it, and that will affect exchange rates.
Hence analysts will be closely monitoring data releases and indications of potential changes in policy, such as in the Bank of England governor’s speeches today and tomorrow, employment and earnings data tomorrow, inflation data on Wednesday and retail sales on Friday.
If you have a trade coming up, do call your trader on 020 8108 5163 to discuss whether now is the time to make a spot trade, or whether to lock in the rate with a forward contract for a trade later this year.
