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A look back at 2021 from the treasury team

Brian Middlemiss, treasury executive, takes a look back at 2021 and how FX markets have fared in post Brexit, post COVID-19 Britain… surely it all went away didn’t it? Read the review.
Published 5 January
6 mins

At around this time last year I wrote an overview of one of the strangest years, in FX market terms, that most of us have ever experienced. This year I thought I would do the same to see how our fortunes have fared in post Brexit, post COVID-19 Britain … surely it all went away didn’t it?

2021 – what happened?

At the beginning of 2021 we got back to work with the news that the UK had finally left the EU and a new more transmissible strain of the COVID-19 virus had taken grip (sound familiar?), but the cavalry was on its way in the form of vaccines and the Bank of England (BoE) standing by to implement emergency measures (negative interest rates) should the economy continue to suffer. GBP/USD stood at 1.3690, EUR/USD at 1.2300 and EUR/GBP 0.9000.

As we moved into spring, the UK emerged as the leading vaccinator of the G20, with the EU only able to cry foul as it accused AstraZeneca of breaking contract. The result was that sterling strengthened across the board to 1.3865, with the single currency being hardest hit as it dropped to 1.1900 against the USD and 0.8500 against the GBP. At this time, the Federal Reserve Bank (Fed) was still only expected to raise interest rates in 2024, with full employment its ultimate goal.

Spring began to move into summer and in the UK the markets were doing a metaphorical hokey cokey. Scottish elections were the main worry, with the prospect of a second independence referendum on the cards should the Scottish National Party win a landslide victory. They didn’t and, to boot, the Organisation for Economic Co-operation and Development amended its UK growth forecast from 5.5% at the end of 2021 to a whopping 7.2%. Inflation had begun to creep into the UK system. With risk easing, it was the USD that took the major brunt of market forces as GBP/USD shot up to 1.4185 and EUR/USD recovered to 1.2230. However, inflation in the US was slowly beginning to build and we heard the first use of the term ‘transitory’… it’s a great political word transitory as it implies a period of transition, but at the same time does not suggest how long this period of transition will continue for … three months, six months, a year? The fact is that nobody knows and as inflation has broken through 6% in the US and over 5% in the UK (levels not expected until around Easter 2022), the Fed and the BoE are still using the term today.
Into the autumn we go and everything is turned on its head once again. The UK is hit with supply issues, leading to long queues at petrol stations and some shops running low on goods. Wholesale gas prices also rocket. On the exchange market there is a flight for the safety of the US dollar, GBP/USD crashes towards 1.34 and EUR/USD moves to 1.15. EUR/GBP remain static as Germany goes to the elections as Merkel steps down. Tapering is on the agenda now, with the US and UK set to announce reductions in their quantitative easing programmes. Inflation is still on the rise across the board.
And as markets went into the festive break, the UK BoE Governor Andrew Bailey threw the ‘we are going to raise rates, no we aren’t, oh yes we are’ curve ball. Meanwhile, in the US, the prospect of interest rate increases has moved from 2024, to the back end of 2022, with the most recent expectation now being mid-2022, especially if unemployment continues to fall and inflation continues to rise.

So what can we expect from 2022?

Anyone with a crystal ball please step forward, but there are a few things on the horizon to keep an eye out for in 2022. Front and centre has to be interest rate movement. In the UK, expectations are that rates will continue to rise, beginning in February, with base rate set to hit 1% possibly as soon as May. There may be a pause to see what effects, if any, these increases have made or did the BoE leave rates too low for too long, meaning that it will be forced to go harder and higher. The US will be much in the same boat, however, the Fed’s directive is to ensure full employment, not to keep inflation low. That said, there has to be a point where the Fed has to act. Some think this will be sooner rather than later or the fact that inflation is ‘transitory’ could prove correct. Regardless, interest rate movement will probably have a major effect on exchange markets throughout 2022. In the EU, it has been well documented that the European Central Bank is not expected to look at any interest rate movement until 2023, despite signs inflation is beginning to heat up in the single market.

Other factors to look out for. Brexit, the gift that just keeps on giving. Fishing has created a few issues of late, along with the matter of the Northern Irish border. We expect hard discussions to continue between the UK and the EU, as well as French presidential elections set for April and May, and we could well see Brexit used as a nationalist football in the hope of maintaining the anti-nationalist status quo. At the moment, it looks like being a very close call on whether Macron will retain power and it could be an even closer contest as to who will oppose him. Regardless, this could easily create some springtime waves across the markets.
And, of course, there is COVID-19. It seems appropriate that we sign off another year talking about the pandemic. We were hopeful that we would have seen the last major impact of the virus on global economies, but that was before Omicron. Undoubtedly, there will be other strains, but the virus does look as though it is weakening. Long may this continue and fingers crossed that by this time next year, it will just be a ghost of Christmas past.

We welcome in the New Year and will be starting our commentaries again on Monday 10 January, and who knows what we will be commenting on in 2022.

about the author

Brian Middlemiss

Brian Middlemiss

Brian is responsible for managing the foreign exchange book across the company’s international jurisdictions. As part of the treasury team, he works closely with our relationship managers to provide foreign exchange solutions for our clients.
Brian joined in December 2018 and has over 35 years’ financial markets experience, working for various global banking operations including Lloyds Bank Plc, Royal Bank of Canada and BNP Paribas.

 

Brian is a member of the Chartered Institute for Securities & Investment and holds the Investment Management Certificate and ACI Dealing Certificate.

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