FX outlook: Parky’s quick take – 1 February 2021

01 February 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 gets more positive vaccine news; Bank of England meet this week

Last week saw the news that the Novovax vaccine trial for coronavirus had an almost 90% efficacy rate. That news was positive, with production of the vaccine due to commence in Stockton-on-Tees, should the vaccine be given approval by the UK’s MHRA (Medicines and Healthcare products Regulatory Agency), over the coming months. The UK government has already ordered 60 million doses, adding to the stockpile of potential vaccine doses it will have. That prompted some strength in the GBP, but with the UK already well stocked, and risk appetite taking some sizeable blows as the US equity markets reversed gains.

There was limited news for markets to cling onto from the UK economy. November/December labour market figures recorded better than expected outturns in terms of falls in employment and increases in unemployment, and there was a larger than expected rise in average earnings growth as well. However, the news wasn’t all good with the CBI (Confederation of British Industry) reporting retailing conditions worsening sharply in January, as the lockdown across the UK began to bite.

This week is all about the BoE’s (Bank of England) Monetary Policy Committee meeting on Thursday. The markets do not expect the BoE to ease further, and if there is someone expecting this outturn, they are keeping very quiet about it. In reality, the interest will be in the Bank’s new inflation and growth projections, which will factor in the lockdown from the beginning of January. How will these affect the outlook for growth and inflation over the next 2-3 years, and what will than mean for the prospects of any moves higher in UK interest rates, or reversal of QE (quantitative easing) bond purchases for the forecast horizon?

The pound is likely to perform better than other currencies against the USD over this week, in particular the EUR, but the question for market participants is whether there remains much appetite to propel the pound to fresh highs against the USD and keep it there?

United States: US data disappoints; Fed worries about data; all eyes on the payrolls

The US economic news last week was disappointing. Although there were further signs of growth in the housing market, these were more of historic interest, and the other data and surveys showed no signs of significant improvement, and in a number of cases were worse than consensus forecasts. The most notable data release was the provisional Q4 GDP (Gross Domestic Product) figures, which reported slower than expected growth in the fourth quarter (albeit only marginally) and weaker inflation pressures.

The Federal Reserve’s meeting and monetary policy decision last week was interesting for a few reasons. Firstly, Fed Chairman Jerome Powell noted that he was more concerned by the moderating pace of expansion that he was signs of bubbles in equity markets. Secondly, he concluded that the Fed were nowhere near exiting massive support for the economy and would signal any steps to reduce the level of asset purchases many months in advance of actually doing so. Finally, there was a small alteration to the Fed’s statement over the economic outlook, which excluded the phrase ‘over the medium term’, suggesting that the Fed was more confident about recovery later into 2021. However, it looks unlikely that the US will recoup all its lost output before the end of 2021, which means any rolling back of stimulus may have to wait until 2022.

This week is all about non-farm payrolls. The US employment situation remains much worse than the overall economy. More than 9.8 million workers remain displaced, either redundant or on unpaid leave, and that has left a gaping hole in consumer spending. December’s non-farm payrolls data reported that the situation was worsening again, and although consensus forecasts for January suggest that there will be a small gain in payrolls, there is still a larger than normal spread of forecasts (-250k to +550k). Also of interest will be what is happening on unemployment, underemployment and average earnings growth. The USD has had a brief respite from the selling pressure it has been under, but the markets remain unconvinced about any upside for the dollar, with risk appetite improving on the global vaccine rollout news.

Europe: Economic news better, but EU scores another own goal on vaccines

Last week saw some broadly positive news from Euroland. The week didn’t get off to a good start, with the German IFO (Information and Forschung - Germany’s Institute for Economic Research) business climate index for January undershooting consensus expectations, and alongside this were weaker consumer confidence readings for Germany, France, Ireland, and the Euroland aggregate. However, the end of the week saw positive news on GDP and consumer price inflation fronts. German inflation leapt from -0.3% year on year in December to 1.0% in January, as temporary tax cuts unwound from the measurement. Spanish and Portuguese inflation readings also rose back into positive territory. Q4 GDP numbers from Germany, France and Spain beat consensus forecasts as well. France’s fall in Q4 GDP at -1.3% quarter on quarter was less than half the 4% decline expected, Spanish GDP rose 0.4% quarter on quarter versus estimates of a 1.4% fall, and Germany recorded growth of 0.1% quarter on quarter, when output had been expected to stagnate in Q4.

It didn’t all go to plan though. A public dispute between the EU and UK/Swedish vaccine producer AstraZeneca, over how much vaccine the EU would receive in Q1, led to the EU, for want of a better phrase, throwing their toys out of the pram, introducing export restrictions for vaccines, and invoking Article 16 to create a hard border on the island of Ireland, something they said would never and could never happen. Although the moves were later reversed and the UK received reassurances that its vaccine purchases would be fulfilled by EU companies, the EU’s reputation was left in tatters, because of entirely self-inflicted wounds. AstraZeneca has subsequently suggested it may be able to supply an additional 9m vaccines to the EU, which may have helped to repair relations there, the EU, through a series of gaffes, have handed a PR goldmine to the UK government.

This week may well see further fall out from the vaccines debacle, and the EUR is likely to remain on the defensive. It is hard to see what data, surveys or events that are due for release could do to support anything other than some temporary respite.

Central banks: No change last week, no change this week either

The central banking environment was a panacea of calm last week. The central banks of Kazakhstan, Hungary, Nigeria, Chile and Colombia all left their interest rates and other monetary measures on hold, and none were expected to do anything else. The positive news was that the rates of infection do now seem to be falling across much of the globe, and, according to the WHO (World Trade Organization), are down around 35% from their peak in late December. The developing world, without the fiscal resources of those in the developed world, have leant heavily on monetary policy. They may have to also lean heavily on the benevolence of vaccine producing nations/companies in order to see a return to more ‘normal’ economic conditions.

This week, the key meetings are likely to be the RBA (Reserve Bank of Australia) on Tuesday, and then the RBI (Reserve Bank of India) on Friday. Although the RBA are not expected to alter monetary policy, it will be whether there has been any material improvement in the economy, in the central bank’s judgement, that will be of interest. In all likelihood the answer will be no, ensuring that current levels of stimulus are kept in place for the foreseeable future.

As for the RBI, they might loosen policy. The market consensus is for no change, but given recent declines in consumer price inflation, spare capacity, and ongoing problems with coronavirus infections might provide enough impetus for a 25 basis point cut. The argument against this is that India is spinning up its vaccination drive, which, like many other countries/economies, is the perceived route map back to pre-pandemic output levels. No change is expected from the central banks of Thailand and Poland on Wednesday, or the Czech Republic on Thursday.

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