Currency Note

Pound weaker after dovish Bailey speech

By Christopher Nye July 2nd, 2021

The pound is weaker against the dollar and is still struggling against the euro after a dovish speech from Bank of England Governor, Andrew Bailey.

Despite warnings from the Bank’s outgoing chief economist over rising inflation, Bailey defended his monetary policy claiming that the rise was temporary and that it was important not to “over-react”.

In the eurozone, President of the European Central Bank, Christine Lagarde, gave a reassuring speech around inflation. Nonetheless, this failed to impress markets or boost the euro.

The dollar remains strong, but this strength could be affected by the Non-Farm Payroll report which is due to be released at lunchtime.

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GBP: Rise in inflation temporary says Bailey

The pound is weaker against the dollar and is still struggling against the euro. Yesterday, sterling saw its lowest level against the greenback in almost 11 weeks. This weakness comes from the combination of dollar strength and a dovish speech from Bank of England Governor, Andrew Bailey.

Following warnings from Chief Economist, Andy Haldane, that inflation could rise to 4% later this year, Bailey seemed unfazed and assured markets that the current rise in inflation was temporary. Speaking yesterday, he said, “it is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.”

As a result, sterling has suffered, and currencies whose central banks are starting to ‘normalise’ monetary conditions, such as the euro and dollar, are benefiting.

The pound has also been hit by weak UK data, with Manufacturing PMI missing estimates.

GBP/USD chart over past year

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EUR: Lagarde speech dismissed by markets

The euro is stronger against the pound but has lost some of its strength against the dollar this morning.

President of the European Central Bank, Christine Lagarde, spoke yesterday about inflation in the eurozone. In her speech, Lagarde said, “We expect inflation in the medium term to stabilize below our objective” of 2% – a figure that hasn’t been seen in eight years. However, this failed to impress markets and boost the euro.

The European Union is currently in the process of rolling out its Digital Covid Certificate to all 27 member states. In theory, this ‘vaccine passport’ should allow quarantine-free travel for EU citizens within EU countries by allowing travellers to prove they have been vaccinated against Covid, have a negative PCR test or have recently recovered from the virus.

USD: Markets await non-farm payrolls

The dollar has started the month strong against both the pound and the euro.

The greenback saw a slight wobble against the euro yesterday after a mixed bag of data releases but has since recovered. Although initial jobless claims beat market expectations at 364k, ISM Manufacturing PMI missed forecasts.

Markets will now be waiting for the Non-Farm Payrolls report that is due at lunchtime. This will give an indication of how the US job market is faring and could impact the dollar’s current strength.

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