The pound was higher against the US dollar on Monday amid little economic data releases and thin trading. The US dollar fell after Friday’s dovish speech by Fed Chair Jerome Powell. Jerome Powell indicated Friday that the central bank will possibly begin tapering before the end of the year, but a rate hike was not imminent as there is still “much ground to cover” before the economy reaches full employment. At the same time, there could be some risk ahead for the pound, due to renewed Brexit concerns.

Jackson Hole symposium

In his much-anticipated speech at the Jackson Hole symposium, Fed Chair Jerome Powel said that the central bank could start tapering its stimulus programme by the end of the year, easing market fears for a quicker withdrawal of its funding.

The Fed took its benchmark rate down to almost zero and accelerated its quantitative easing programme in an attempt to resuscitate the economy during the early days of the Covid-19 pandemic.

The question of when the Fed will begin to tighten its programme has been the main concern for markets for some time now, and it might remain as Powell avoided to give any definite answers. The Fed is aware that any specific answers could seriously impact the global economy, this is why it has chosen to postpone any reduction of its funding.

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” Powell said during the summit. He added that inflation is close to the Fed’s 2% target rate, but “we have much ground to cover to reach maximum employment.” Markets reacted positively to Powell’s comments, with major stock indexes rising higher.  

Fed Vice Chairman Richard Clarida also agreed with Powell’s remarks. He explained that tapering could be possible by the end of this year, as long as labour gains continue: “I think that if that materialises, then I would support commencing a reduction in the pace of our purchases later this year,” Clarida noted.

The Fed said that “substantial further progress” will need to be seen before tightening policy. Powell said that in terms of inflation the “test has been met” and that there “has also been clear progress toward maximum employment.” He said that the Fed agreed at the July Federal Open Market Committee meeting that “it could be appropriate to start reducing the pace of asset purchases this year.”

Powell defended the Fed’s policy and decision not to make an “ill-timed policy move” and stated: “Today, with substantial slack remaining in the labour market and the pandemic continuing, such a mistake could be particularly harmful. We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.” Additionally, he stressed that the delta variant “presents a near-term risk” but “the prospects are good for continued progress toward maximum employment.”

Renewed Brexit concerns

The UK government supply chain crisis could have a significant impact on Christmas and create further food shortages over the next year too. Iceland, Nandos, KFC, McDonald’s, and Tesco are among the many businesses that are reporting stock issues as a result of lorry driver shortage due to Brexit. Restaurant chains Nandos and KFC are facing chicken shortages, McDonald’s is finding it difficult to make milkshakes and Iceland is running out of bread and soft drinks. The problem has become noticeable over the summer when social media was flooded with images of empty shelves.

The disruption was then largely blamed on the “”, but businesses have for a long time now warned of a chronic shortage of lorry drivers due to Brexit. Speaking to BBC Radio 4’s Today programme, Iceland managing director Richard Walker said the lack of lorry drivers “is impacting the food supply chain on a daily basis.” “We’ve had deliveries cancelled for the first time since the pandemic began, about 30-40 deliveries a day,” he said.

British Poultry Council chief executive Richard Griffiths said last week that “When you don’t have people, you have a problem - and this is something we are seeing across the whole supply chain. The labour crisis is a Brexit issue,” he said.

Nick Allen of the British Meat Processors Association warned that such shortages will impact on Christmas staples: “We are cutting back and prioritising lines and cutting out on things, so there just won’t be the totals of Christmas favourites like we are used to.”

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The British currency rose against the US dollar and the euro, after the return of investor confidence.  With the recovery of major stock markets, investor risk appetite returned helping boost currencies such as the pound which are closely influenced by global market sentiment. The pound is considered a risk currency and is vulnerable to risk-off sentiment at times of risk-on.

Major concerns such as the Delta variant and the Fed’s removal of its stimulus programme will be the main drivers for global currencies such as Sterling. While there is still significant uncertainty about how the delta variant will affect markets, most developed economies are expected to grow steadily. Nonetheless, Sterling will remain sensitive to global developments than domestic economic data, as the economic calendar is thin with releases of little impact.

Risk on and Risk off sentiment

The widespread risk on and risk off sentiment, also known as RORO is the major driver of currencies in the market at the moment. Two of the key concerns of global investors are the withdrawal of the Federal Reserve’s stimulus and the rapid spread of the Delta variant in Asia.

But what is exactly risk sentiment? Simply, risk-on risk-off refers to shifts in investment activity as a result of global economic events. The foreign exchange market is basically affected by changes in the ways investors behave and where they choose to invest. The theory states that investors engage in higher risk trades when the risk is considered low and avoid high-risk investments when the risk is perceived to be high. So, investor appetite changes depending on global sentiment and whether risk is high or low. For example, the 2008 financial crisis was considered a risk-off year, as investors avoided risk by selling their risky assets and turning towards low or no risk positions such as U.S. Treasury bonds.

The risk-on risk-off sentiment is also affected by different asset classes, as some carry higher risks. Stocks are riskier than bonds and so when stocks are preferred more than bonds then the market is considered a risk-on environment. A risk-on environment is one where investors invest into riskier assets.

A risk-on environment is usually one where a combination of positive economic factors, data and events co-exists, showing that the market is healthy and strong, and risk is limited. Strong economic data such as corporate earnings, an optimistic outlook, and supportive central bank policies reflect a market where investors have more room to take on more risk.

Federal Reserve and monetary stimulus

In the coming week, the fundamental concern for markets will be the Federal Reserve's decision to withdraw monetary stimulus. On Thursday, Federal Reserve Chair Jerome Powell will give a speech at the Jackson Hole central banking symposium and investors expect him to announce the Fed is ready to start reducing stimulus, possibly as soon as this September. While this is good news for the  US dollar, stock markets which have been supported by the Fed’s funding will find the news disappointing. This will also affect the British pound which could fall following such an announcement. For some analysts, Powell might avoid bringing up monetary policy at the symposium, but others believe that the dollar will weaken if the Fed postpones the planned withdrawal of its funding.

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

Sterling rose to an eight-month high due to dollar weakness and after Federal Reserve Chairman Jerome Powell said on Thursday that the Fed will tolerate inflation above 2.0%. This gave investors hope that the Fed will not try and control economic growth, something that could hurt the US dollar in the near future. On the other hand, on Friday, after Bank of England Governor Andrew Bailey’s speech, the pound remained unmoved. Both Bailey and Powell gave their speeches at the Jackson Hole central bank symposium which was held online this year rather than at the usual ski resort in Wyoming.

Fed’s decision marks a significant shift in monetary policy

The Federal Reserve has approved a significant change in the way it sets its interest rates by abandoning the usual practice of raising them to control higher inflation, something that will leave US borrowing costs extremely low. By signalling that it wants inflation to rise moderately above its 2% target, the Fed confirmed that inflation targeting in a world of lower interest rates is a thing of the past.

Andrew Bailey’s speech

On Friday, the Governor of the BoE delivered his keynote address to fellow central bankers online and not from the actual ski resort in the Grand Tetons where the conference was traditionally organised since 1982.

In his speech, Bailey said that central banks have a lot of strength to use quantitative easing to manage crises, such as Covid-19. As he noted characteristically, “Go big (and fast) or go home.”

The Bank of England governor did not provide details over short-term policy or on the UK economic situation, but he did reassure the financial community that the Bank will be able to deal with future crises: “We are not out of firepower by any means, and to be honest it looks from today’s vantage point that we were too cautious about our remaining firepower pre-Covid. But, hindsight is a wonderful thing when you have it.”

He also said that the Bank won’t seek to restrict monetary policy until there is significant economic progress: “The committee does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably. This important step is intended to ensure monetary conditions do not tighten prematurely when there are some initial signs of an economic recovery.”

According to Bailey, QE will be “more long-lived” and that the Bank has the power to fight recessions. In regard to Jerome Powell’s comments from yesterday, Bailey said that these suggest that flexibility can be useful for monetary policy and that a different exchange rate environment could justify different approaches.

The Bank of England increased quantitative easing by £745 billion in June, and in March it cut its main interest rate to a record low 0.1%. A paper with the Bank’s conclusions will be published alongside Bailey’s speech.

Are you Transferring funds abroad?

Whether you are sending money to family and friends, buying a property or paying your children’s tuition fees, Universal Partners FX are the leading foreign exchange experts who can ensure you get the best rates and transfer your money safely, fast and efficiently. With state-of-the-art software, a dedicated team of currency brokers, and friendly customer support, UPFX can offer peace of mind, transferring your funds securely and in the most transparent and professional manner.

Get in touch with Universal Partners FX to learn more about transferring your funds overseas.