FX outlook: Parky’s quick take – 04 May 2021

04 May 2021

Neil ParkerFX Markets Strategist

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What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

United Kingdom: UK focus on Bank of England meeting after house prices jump; local election results this week

The UK enjoyed a relatively quiet data week last week, with only the CBI (Confederation of British Industry) retail sales survey, the British Retail Consortium’s shop price data, Lloyds business barometer and the Nationwide house price survey, all for April, released. What these figures indicated wasn’t particularly surprising, retail activity continues to recover after lockdown, and that businesses are generally reporting a recovery. Perhaps the only surprise was the strength of the UK housing market, with the Nationwide reporting prices up a further 2.1% month on month in April and 7.1% higher than a year earlier.

Last week also saw matters political remain at the forefront of media reporting, with the Prime Minister, Boris Johnson, repeatedly asked about who funded the makeover for the flat above No 11 Downing Street. Though the matter seems to be making little impact with the general public, there are several investigations, including one from the Electoral Commission, looking at the matter. This after the former Prime Minister, David Cameron, acting on behalf of Greensill Capital, was embroiled in a lobbying scandal only recently. Markets also paid only a little attention to this, but the pound has struggled to make headway whilst these issues have been front and centre in the media, and whilst the fundamental evidence has been so light.   

The UK surveys pointing to a slightly larger than expected rebound will pose a question about the need for ongoing monetary loosening, which the Bank of England will consider at this week’s Monetary Policy Committee meeting. That meeting coincides with the publication of Q2 Monetary Policy Report and updated projections for growth and inflation. The Bank of England isn’t expected to adjust policy or its language surrounding future policy moves, but the forecasts are likely to reflect an improvement in the economy’s performance versus previous Bank projections. Ahead of the Bank’s announcement, final April manufacturing and services PMI (Purchasing Managers’ Index) are released, and may indicate an even faster pace of recovery than already recorded.

Also this week we have local elections in the UK, but also the Scottish Parliament and Welsh Assembly elections. The local elections are a barometer on the performance of both government and opposition parties, and recent polling suggests the government will do well. As for the Scottish Parliament and Welsh Assembly elections, both could be viewed as an unofficial poll on independence. Will the SNP win a majority, will Welsh nationalists make headway in these elections?

The pound has made no progress in recent weeks against any of the majors, and this despite some significant developments in those economies also. The Bank of England’s decision is unlikely to offer the GBP support, and the FX risks around the local and elections for national parliament are negative, in my view. 

United States: Fed stands pat, Biden asks for more spending, GDP fizzes

The Federal Reserve met and decided on monetary policy on Wednesday of last week. They decided that the best course of action was to leave policy unchanged, as expected, but recognised that some of the negative risks had reduced, with the economy in better shape than had been expected only six weeks earlier. The Q1 GDP (Gross Domestic Product) figures recorded a sharp increase in output, prompted by the rise in consumer spending that had in turn been fuelled by government stimulus. The rise in activity was slightly less than consensus, but may be revised up in subsequent releases.

There were some other notable data and survey releases from the US last week. Conference Board consumer confidence rose to 121.7 in April, from 109.0 in March, the highest reading since February 2020. The University of Michigan consumer sentiment index rose in the final estimate, after the preliminary figure disappointed, and March personal spending and income rose by more than consensus forecasts.

One question hanging over the heads of the financial markets remained the fiscal stimulus that President Joe Biden is trying to get the other arms of government to agree to. However, far from looking to compromise, the President doubled down, presenting a $1.8 trillion package to support better childcare and educational support for Americans. That prompted a pull-back in risk appetite and the dollar benefited from this.

For this week the key release is the US non-farm payrolls data for April, due on Friday. With the jobless claims data showing a sharp drop in claims in recent weeks, will payrolls report another bumper increase?  Consensus forecasts suggest that the net payrolls increase could be close to 1 million, and the unemployment rate could drop a further 0.2 to 0.3 percentage points on the back of this. Payrolls aren’t the only significant release of the week, with manufacturing and services ISM (Institute for Supply Management) indices released ahead of the payrolls data, but financial markets are unlikely to have eyes for much else. 

Europe: Euroland Q1 GDP drops less than expected whilst inflation closes in on target

After the previous week’s lack of action from the European Central Bank, last week’s data and survey releases from Euroland indicated that the central bank were right to act cautiously. After the surprise of the German IFO (Information and Forschung / Germany’s Institute for Economic Research) survey, which barely improved, there was weaker German consumer confidence as well. German unemployment rose in April, more than wiping out the fall that had been seen in March, and Euroland M3 money supply numbers recorded a drop in the growth rate. The news wasn’t all bad, with the Euroland economic confidence numbers jumping in April, thanks to a sharp increase in industrial and services confidence, and Euroland Q1 GDP shrank by 0.6% quarter on quarter, less than the 0.8% quarter on quarter drop expected by market consensus forecasts. There was also the small matter of the Euroland consumer price inflation numbers for April, which recorded a rise in the headline rate from 1.3% to 1.6% year on year. The ECB (European Central Bank) aren’t likely to jump at the sight of inflation, much of which is likely temporary.

After the German CDU/CSU (Christlich-Demokratische Union/Christlich-Soziale Union) alliance settled on Armin Laschet for their choice of candidate for Chancellor in the upcoming September Federal elections, the hope may have been that this would assist the party with a bounce in the polls. So far though no such bounce has occurred, with the Green party shown to be leading in four of the last six polls. Also in the world of politics, the European Parliament finally ratified the UK/EU trade deal, and the UK recognised the EU’s Ambassador after months refusing to do so.

For this week, having already had the final April manufacturing PMI release, the attention is likely to be on the services PMI release on Wednesday. Will it report a further improvement, lifting the rate further above 50. The signs are that the negative risks from COVID restrictions are reducing, and whilst it may take a few months more for normality to return, the need for additional stimulus seems to be diminishing. March industrial production figures from a host of Euroland nations are due at the end of the week, and could further support the argument that the recovery needs no extra boost.

The euro began last week in constructive mood, and rallied against the US dollar for the bulk of the week, reaching a high of $1.2150 on Thursday. Friday though saw a sharp drop, wiping out all of the gains seen in all the sessions since Monday, and more. A drop in risk appetite seems to have driven the euro’s retreat.

Central banks: No change last week; Brazil to hike this week

Over the last week, the likes of the Bank of Japan, the central bank of Hungary, and the Colombian central bank all announce on monetary policy. The BoJ (Bank of Japan) slightly raised its growth forecast but also suggested that inflation would take at least three years to return to target, but possibly longer. There was nothing within the BoJ statement to suggest that the central bank would adjust monetary policy in the foreseeable future, or at least not in terms of a tightening. The central bank of Hungary left policy on hold as well, but there was a rare criticism of the government from its Chief, Gyorgy Matolcsy, who argued the budget deficit should be reduced more quickly than was planned. The risks of inflation from an overheating economy, that Hungary’s fiscal largesse could add to, would appear to be the central bank’s central concern. Finally, the central bank of Colombia met late on Friday, and left policy on hold.

This week’s central bank calendar is busy, with the Bank of Thailand, central bank of Brazil and National Bank of Poland all deciding policy on Wednesday, and the central banks of Malaysia, Norway and Czech Republic policy decisions on Thursday. No change in stance or policy is expected from the central banks of Thailand, Poland, Malaysia, Norway and the Czech Republic, but the Brazilian central bank is expected to tighten policy from 2.75% to 3.5%. Despite high infection numbers, which has caused reduced activity levels in recent weeks, the recovery remains robust enough to prompt the change from the Brazil’s policymakers. Where Brazil leads will other Latin American central banks follow?

To read the previous quick take, click here

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