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

02 June 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: GBP tests higher but struggles to hold above $1.42

There was very little significant data or surveys released last week, but that didn’t prevent some more volatility in the pound. That was prompted in part by comments from the Scottish First Minister, Nicola Sturgeon, who recommitted to another independence referendum after the COVID crisis was over. The pound fell on the back of this news, albeit that the timing of the referendum remained vague.

However, GBP then rebounded, thanks to comments from Bank of England Monetary Policy Committee member Gertjan Vlieghe, who suggested the BoE (Bank of England) could increase interest rates more quickly than currently anticipated. His comments were caveated, in that it referenced a smooth labour market transition post the end of the furlough scheme and stronger than expected growth, stating that this was not the BoE’s central scenario, but an upside risk.

The GBP continued to struggle to make a sustained break through $1.42. There have been multiple failures around this level, and whilst it is not impossible for the pound to push higher from here, it is becoming more challenging.

Could this week’s data and surveys provide the impetus? Perhaps, with May Nationwide house prices, April lending to individual’s data, and the May manufacturing, services and construction PMIs (Purchasing Managers’ Index) due. House prices have already been released and showed 1.80% increase compared to expectations of 0.80%. The final May manufacturing PMI index has also been released and against the preliminary reading of 66.1, it showed 65.6 below consensus. The lending data is expected to record further strength in mortgage lending, albeit down from March’s peak, and the PMIs could record additional strength in activity across some sectors, but given where the readings are, there is likely to be limited further upside.

Sterling might be more interested in some releases elsewhere, or at least the comparison with the PMIs in Europe and the US, and only if there is a significant outperformance in the UK data and surveys versus those economies would there be a strong fundamental reason for the pound to strengthen further.  

United States: US payrolls take centre stage

The US data and surveys suggest less conviction in terms of the pace of recovery. Last week saw more housing market data that suggested the pace of activity was slowing, consumer confidence weakened, and though the job market still looks to be recovering, the number of jobless claims and continuing claims remains elevated well above pre-pandemic levels. Overall then, nothing in these releases offered any semblance of support to the US markets, and the dollar remained under pressure for the bulk of last week.

Meanwhile, President Biden’s hope of a transformative package of tax and spending measures rests with moderate House and Senate Democrats, who have thus far shown limited enthusiasm for the programme presented to them. The Republicans offered a compromise deal to the White House’s infrastructure plans, but that was around $1 trillion smaller than the package Biden wants, and reports suggested Biden was unimpressed with the counteroffer.

This week sees the release of US May non-farm payrolls. After April’s data was so disappointing versus consensus forecasts, expectations for May’s gain is a lot less optimistic, at around a net 600k gain. Ahead of that release the US will get an update on the Federal Reserve’s latest economic assessment, the Beige Book, and manufacturing and services ISMs (Institute for Supply Management) for May. Overall, this package of data, surveys and reports has the potential to re-energise opinions about the US recovery, but with the exception of the payrolls data, it is doubtful anything will surprise. Payrolls though could outperform, after last month’s disappointment, with anecdotal evidence suggesting that businesses are rehiring workers at pace as conditions return to a greater semblance of normality.   

The US dollar, which has been languishing at the bottom of recent ranges lately will be hoping for some fundamental reset to help power it to fresh gains, having seemingly found a near term base.

Europe: Increasing confidence in recovery in Euroland

Confidence data over the course of last week was generally better than expected. That culminated in the release of Euroland confidence indicators for May on Friday, which reported economic confidence at its highest level since January 2018. That positive news was somewhat tainted by the revised Q1 French GDP (Gross Domestic Product) figure, which recorded an unexpected drop in output of 0.1% quarter on quarter, having originally recorded a 0.4% expansion, whilst April consumer spending dropped 8.4% month on month, against consensus expectations of only a 4% drop.

An article published by Bloomberg suggests that the European Central Bank, who meet on 10th June, are now expected to leave in place its faster pace of bond buying, according to a number of banks. However, there has been speculation in financial markets that there is less of a need for such ongoing intervention, which has in part been responsible for the improvement in the EUR’s value.  

This week’s data and surveys could lend additional weight to the argument of a pullback in asset purchase amounts. Already released have been the provisional May consumer price inflation figures from Italy and Germany. These recorded 0.3% for Germany (0.3% as expected) and 0.0% for Italy (0.1% expected). German unemployment, which rose by 9,000 in April declined by 15,000 in May, indicating that the German labour market strengthened. We’ve also seen the final May manufacturing PMI for Euroland, which came out at 63.1 versus the initial outturn of 62.8. For the remainder of the week, the focus will be on Thursday’s services PMI reading. Can Euroland record some closing of the activity gap between itself and other major economies? The PMIs could provide the strongest argument against extending the faster pace of asset purchases.

The euro continues to try higher against the US dollar, but is there really more upside to come, or will FX markets be more rangebound as they wait for a decisive break in the fundamentals?

Central banks: No real changes last week, but plenty of optimism

Last week’s central bank meetings including the Bank of Indonesia, the Reserve Bank of New Zealand and the central bank of South Korea, didn’t see any change to the monetary policy stance, but optimism did rise regarding the economic outlook. The Bank of Indonesia pointed to improvements in confidence indicators and some activity data as characterising a sharper rebound in Q2. The Reserve Bank of New Zealand left policy on hold for now, but noted some increased confidence in the economic outlook and projecting a rise in official interest rates in H2 2022. The Bank of Korea also pointed to a 2022 rate rise as a combination of upbeat growth forecasts and higher inflation projections signalled the need for such an accommodative monetary stance would soon fade.

This week there were three main central bank meetings in focus. We’ve already had the Bank of Israel and the Reserve Bank of Australia announce. Neither was expected to alter the monetary stance and neither did. That leaves the Reserve Bank of India, due to announce on Friday. Expectations are for no change in policy, with any fears over inflation, that appears to be prevalent in Asia, counterbalanced by the recent increase in COVID infections. Growth is likely to have been adversely affected since the beginning of Q2 because of the rise in cases, such that this could, at the margin, push out the timing of India’s recovery. That in turn would constrain the Reserve Bank of India from tightening until the recovery is well established, which is likely to be H2 2022 at the earliest. 

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