What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: GBP stumbles after prolonged run higher; have we reached peak optimism?
Last week, the pound rallied to fresh highs against the USD (above $1.42), and the EUR (briefly above €1.17). The optimism surrounding recovery was part of the driving force behind this, with UK yields rising, along with commodity prices and equities. However, having hit the highs on Wednesday, the pound then fell back sharply, as some used the new highs to take profit and reassess how much further there is for the rally to go.
There is certainly an argument about additional optimism from here. Is it likely that the vaccine programme will accelerate, as first and second vaccine doses become due? For example, some GP surgeries are processing up to 1000 jabs per day, alongside the mass vaccination centres. Will supply be able to keep up with demand, or even surpass it?
The data from the UK on vaccines reported first vaccinations surpassing 20 million over the weekend, and second vaccinations rising towards 800k jabs delivered. In order for the economy to return to more normal conditions, the UK needs to vaccinate the entire adult population, which is estimated at 54.1m according to the most recent data. That will mean 108m jabs in total, so the UK is less the 25% of the way there currently.
In terms of this week, we've already had UK consumer credit figures for January, which reported a £2.4bn decrease in net unsecured lending, a further sign that household might have significant additional firepower for consumer spending as the economy unlocks. The manufacturing PMI (Purchasing Managers’ Index) figures for final February were also more positive, showing activity slightly stronger than initially reported (55.1 vs 54.9). In the remainder of this week, there is unlikely to be much from the Nationwide house prices data for February, final February services PMI or the construction PMI, also February, to offer the pound more support. Indeed, there could more challenges for the pound as we head through the rest of the week, with the big focus on the Budget on Wednesday after Prime Minister’s Questions, a preview of which can be found here.
United States: Biden urges Senate to pass stimulus bill quickly; payrolls in focus
The US House of Representatives passed Joe Biden's $1.9 trillion stimulus package early on Saturday, have faced problems pushing through the $15 per hour minimum wage element, and thus removing it from the bill. The stimulus package now faces scrutiny from the US Senate, which is split evenly between Democrats and Republicans, so the Vice President, Kamala Harris, will have a tie-breaking vote, if necessary.
In the meantime, the economy reported some improvement in absolute, with stronger than expected consumer confidence, new home sales and durable goods orders, more than counteracting slightly weaker Q4 GDP (Gross Domestic Product) figures, pending home sales and underperformance from personal spending, despite a sharp increase in personal income.
For the week ahead, the Senate discussions on the stimulus bill will be of significant importance, as these could accelerate the return to pre-COVID levels of economic activity. Undoubtedly though the key release of the week is the US non-farm payrolls data for February. These reported only a 49k rise in net payrolls in January, and the expectation of a 180k rise in February (which is the market consensus) could still prove disappointing.
The USD has made limited gains, but the risk rally does seem to be under pressure, so the moves against the EUR and GBP might have room for expansion.
Europe: Over 6m AstraZeneca vaccine doses unused
One of the mounting scandals in Europe is the way in which European leaders have undermined confidence in the AstraZeneca vaccine, to the extent that the public is rejecting the jab, or deemed ineligible for it. This began with the dispute between the EU and AstraZeneca over the number of vaccine doses it could supply, but now that this supply is being increased, it is hard to find recipients to accept it. The leaders of France and Germany, Macron and Merkel, have pushed a narrative that is now backfiring on them spectacularly.
Looking at the vaccination data from the website ourworldindata.org, the European Union have vaccinated fewer than 7.5 people per 100, whilst the UK is almost at 31 per hundred. The pace of vaccinations may have started to increase in the European Union, but there are still problems that continue to hamper the vaccine delivery, include supplies of the other vaccine and slow approval of new vaccines. Some European Union countries have suggested the will unilaterally approve other vaccines, such as the Russian vaccine, without waiting for the European Medicines Agency.
In terms of the economy, there were some signs of stronger activity last week, which have been demonstrated in data and survey releases at the beginning of this week, but it is not a uniform improvement being observed. This week's releases include Euroland consumer price inflation figures for February and January unemployment data. It is unlikely that these releases will help the EUR recover more of recent lost ground, since the outturns won't be sufficiently divergent from consensus expectations.
Central banks: No change last week, none this week
Last week's central bank meetings reported no change from the Bank of Israel, central bank of Hungary, Reserve Bank of New Zealand or South Korean central bank. That wasn't a surprise, although with the Israeli economy rapidly unlocking, there is an intensifying risk that the Israeli central bank will be one of the first to start to correct ultra-loose monetary policy, unless there is an unjustified strengthening in the shekel, relative to other countries.
This week we expect no change in interest rates from the RBA (Reserve Bank of Australia), The National Bank of Poland or the central bank of Malaysia. There could be commentary from the RBA around the rise in yields, seen globally, as well as ongoing concern regarding the strength of the Aussie dollar. Overall though we should expect few surprises from this week's crop of central bank meetings.
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