The foreign exchange markets have quietly begun a week in which US job figures are expected to be central. It’s not a busy day. The summer calm in financial markets seems to be approaching, which is also reflected in the low levels of implied volatility: it is currently not expensive for investors to insure themselves against volatility of the large currency pairs, as investors do not see much reason for market turmoil with large price movements.
The British pound goes slightly better than the euro, with market commentators referring to the departure of Health minister Matt Hancock. He was photographed kissing his assistant during the COVID, and after a fuss was made about it. His successor, Sajid Javid, has said that he wants to prioritise the economy over public health, which, according to market followers, would mean that the likelihood of a further extension of the restrictive measures has been reduced.
The question is whether it is the minister who will determine the extent of restrictions, or the virus, a variant of which is currently prevalent in the UK.
On the macro front, this week’s attention is focused on German inflation rates that may be higher than expected, which could lead to speculation about greater pressure on the European Central Bank to tighten monetary policy earlier. Due to various VAT and other effects, this inflation rate gives a disturbing picture this year.
For the euro/dollar we predict a further rise for the dollar rather than that the euro will camp again above 1.20 dollars.
Statements by ‘lesser gods’ in the Federal Reserve about possible previous interest rate hikes are nevertheless perceived by the market as a prelude to a spin that monetary heavyweights in the Fed, including Chairman Jerome Powell and Lael Brainard, are expected to make on this point. If that happens, a situation euro / dollar at the previous levels of 1.21-1.22 is difficult to imagine any more.