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June 2021 - Monthly Economic Outlook

1 June 2021


Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.
High: 1.2267 / Low: 1.1985 / Variation: +0.53%

Despite inflation fears, risk appetite remains dominant on the foreign exchange market, with positive developments for the euro (EUR). Over the past two weeks, central bankers on both sides of the Atlantic have sought to reassure forex market operators about the future course of monetary policy.

The message is clear. Inflation is not projected to last, so no plans to adjust monetary policy are on the cards in the immediate future. In the US, Charles Evans, CEO of the Federal Reserve Bank of Chicago, plainly stated that the Fed will uphold its quantitative easing programme at the annual rate. A distancing from this rate is not planned, and it remains doubly unlikely given the federal government’s financing needs.

For the US to continue financing its high level of public debt at low rates, the Fed must remain a major player in the markets and absorb excess debt. The eurozone is sending out a similar message, with Lagarde, Stournaras and Villeroy having indicated there is no reason to change the pace of asset repurchase programmes, or quantitative easing. This suggests that the Fed and ECB meetings in June are unlikely to bring many surprises.

High: 0.8722 / Low: 0.8553 / Variation: -1.09%

As predicted, the pound sterling (GBP) has resumed its appreciation against the euro (EUR). The UK economy has reopened faster than the eurozone economy. This has made traders more optimistic, despite localised concerns about the Indian variant, therefore benefitting the pound sterling.

But no one in the UK is sure about inflation or where it will go. As in the US and the eurozone, the Bank of England considers any rise in inflation to be temporary. In concrete terms, however, this means that monetary policy normalisation is not yet on the cards. The Bank of England is keen to maintain an accommodative bias over the medium term, mainly to support the economy when the Job Retention Scheme expires on 30 September.

The Bank of England forecasts an increase in the unemployment rate from 4.8% in the first quarter of 2021 to 5.8% by the end of the year. This strongly argues in favour of maintaining the asset repurchase programme, also known as QE, or quantitative easing.

High: 134.07 / Low: 130.98 / Variation: +1.30%

The best evidence that risk appetite prevailed in the foreign exchange market in May was the strong rise in the euro (EUR) against the Japanese yen (JPY), as the latter is typically considered a safe haven.

The only other noteworthy point to mention about the currency pair is that the latest minutes of the Bank of Japan meeting on 18 and 19 March highlighted members’ willingness to maintain a clear accommodative bias. In contrast with the debate in Europe and the United States, Japan is still chiefly concerned about deflation.

Barring a complete economic paradigm shift in June – which is unlikely – there is every reason to believe that the euro will continue to rise against the yen.

High: 1.1064 / Low: 1.0931 / Variation: -0.40%

The euro-Swiss franc pair (EUR/CHF) fluctuated within an extremely tight range (around 100 pips) in May.

The pair is expected to remain stable in the short to medium term. The Swiss National Bank (SNB) is likely to hold its key rate at -0.75% and continue its direct interventions on the foreign exchange market to curb the appreciation of the CHF, which the Swiss government still considers significantly overvalued.

Fortunately, current levels of reflation are limiting upward pressure on the Swiss franc, making things much easier for the country’s central bank.

High: 1.5014 / Low: 1.4851 / Variation: -1.08%

As is always the case, risk appetite favours commodity currencies. This explains the sharp rise in the Canadian dollar (CAD) against the euro (EUR) in May. It also reflects the continued rise in commodity prices.

The Bank of Canada’s monetary policy has sought to balance the two by tapering its asset purchases from CAD $4 billion to CAD $3 billion per week, while stressing that the economy will need some form of monetary support over the long term.

As things stand, the current process of economic reopening and the prospect of economic activity returning to normal is expected to continue supporting the commodity market and, in turn, currencies that are heavily dependent on them, such as the CAD.

High: 1.5835 / Low: 1.5479 / Variation: +1.10%

A very broad fluctuation range for the euro-Australian dollar pair (EUR/AUD) was observed in May (almost 400 pips). It is a prime example of why the right currency hedging strategy is needed.

The next key date for the pair is 1 June, when the Reserve Bank of Australia (RBA) will announce whether it will adjust its asset purchase programme. Its decision depends on short-term macroeconomic developments.

Most market players do not expect any official intervention until July, leaving the central bank a month to lay the groundwork.

High: 7.8682 / Low: 7.7678/ Variation: -0.50%

In May, the euro-yuan (EUR/CNH) pair fluctuated within a very narrow range of about 10 pips. The CNH continues on its upward underlying medium-term trend, directly reflecting hopes for a strong economic recovery in China.

Moreover, China could decide to let its currency rise to offset the growing cost of raw material imports. At this stage, this is only a possibility, but it is increasingly being raised by senior Chinese officials.

If this were to happen, however, the appreciation would likely remain gradual to limit a negative market reaction.

High: 363.73 / Low: 346.79 / Variation: -3.37%

Of the pairs we are following, the euro-forint (EUR/HUF) took the biggest drop in May (down 4.06%) following the announcement by the Deputy Governor of the Hungarian central bank of an imminent rate increase, probably as early as this month.

Faced with significant inflationary pressures (a consumer price index at 5.1% year on year in April), the central bank will probably have to adjust its monetary policy. We expect the rise in June to set off a new cycle of tightening monetary conditions.

We forecast a hike in the main base rate of 75 basis points this year. The forex market has already priced in the prospect of higher rates, but we believe a short-term decline in the euro is not completely off the table.

Economic calendar:
01/06  AUD

Central bank meeting

 03/06 USD

ADP US Employment Report for May

04/06 USD

US Non-Farm Payroll report (NFP)

 08/06 EUR

ZEW Economic Sentiment Index for Germany

10/06 EUR

Central bank meeting

15/06 USD

First meeting between Biden and Putin (Geneva, Switzerland)

16/06 USD

Central bank meeting

22/06 HUF

Central bank meeting




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