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

02 November 2021

Neil ParkerFX Markets Strategist

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Neil Parker, our FX Markets Strategist, shares his views on the currency markets this week

UK – Bank of England meet, but is it too soon to tighten?

Last week’s data and surveys reported renewed strength in retail, according to the Confederation of British Industry in their October survey, and a further surge in mortgage lending in September. The strength of the housing market has endured even after the end of the stamp duty holiday, with a lack of available housing stock seemingly a large part of the problem. However, the data and survey releases, whilst interesting, played second fiddle to the UK Chancellor’s Budget statement.

Rishi Sunak announced a raft of spending measures, paid for in part with some pre-announced tax increases, and the market seemed to be undisturbed with the raft of measures announced. However, on the face of it the rise in taxation for individuals and businesses could have a negative effect on economic activity in 2022 and beyond, when taken in conjunction with the rise in headline inflation. The 2022 growth forecast from the Office for Budget Responsibility (OBR) was revised down to 6% from 7.3%, but only after the 2021 forecast was revised up to 6.5% from 4%.

The OBR’s expectations for growth in 2021 suggest a solid, if not spectacular, end to the year. 2022 may face additional challenges in terms of supply of materials and labour shortages, as well as the risk that there are new variants of Covid that require additional vigilance. Risks may therefore be to the downside on that growth forecast, which could undermine the case for significant rate increases in 2022.  

This week there will be plenty of interest in the Bank of England’s Monetary Policy Committee (MPC) decision on Thursday at midday. The likelihood is that the MPC will leave policy unchanged, although it won’t be a unanimous decision, with at least two members of the committee expected to dissent in favour of a small rate rise. Given how split the financial markets appear to be on this decision, a ‘no change’ outturn could prove GBP negative, in the absence of any particularly interesting data releases. In particular, there is a risk versus the EUR, which the pound has been outperforming for weeks.

US – Federal Reserve to slow the pace of asset purchases; payrolls to show progress?

Last week’s data and surveys from the US reported some surprisingly robust house price inflation figures in August, and a renewed surge in home sales in September. However, the Q3 Gross Domestic Product (GDP) figures, which reported annualised growth of just 2%, disappointed lacklustre expectations, and measures of consumer confidence for October showed limited recovery from September’s dismal readings. There was though a sense of ‘wait and see’ about financial markets, with their gaze firmly set on events of this week.

The US dollar held up well despite the disappointing GDP figures, which still recorded solid, if unspectacular growth. The dollar is perhaps benefiting from doubts in other economies, or the ongoing imposition of restrictions in some parts of Asia. Though, how much further can the USD go? If the improvement in risk appetite continues, the USD might find it difficult to maintain its momentum.

This week the attention of markets is split between the Federal Reserve’s monetary policy meeting on Wednesday, and the US non-farm payrolls data for October. The Federal Reserve are expected to instigate the taper of its asset purchase programme, which should be completed quickly (within 9 months to 1 year). There might be hints about the possibility of a rate hike in 2022, although the Fed have appeared to be in no rush to tighten previously, and little has changed between this and September’s meeting. As for the non-farm payrolls data for October, after the disappointment of September’s 194,000 net payrolls are forecast to rise by 450,000. Also, worth watching is the unemployment rate, expected to drop to 4.7% from 4.8%, and the participation rate, which has been stubbornly fixed around 1.7 percentage points below its pre-crisis level.

Euroland – hoping for an improvement as we head into year-end after ECB stand pat

Last week’s European Central Bank (ECB) meeting wasn’t the only highlight of the week, but it provided plenty to counterbalance the recent moves in financial markets. The ECB President, Christine Lagarde, was at pains to stress that the ECB felt under no pressure to alter the timing to the end of support measures for the Euroland economy, which in turn indicated that rate increases are a long way off. The ECB’s decision on rate hikes will be determined by how quickly the economy can recoup its lost output, and how much spare capacity remains in the labour markets once support measures are concluded.

Last week saw Germany’s Institute for Economic Research (Information and Forschung), business climate index dip below consensus forecasts. The October reading, of 97.7, was the worst since April, when restrictions were in place because of rising Covid case numbers. German Q3 GDP figures were also disappointing, growth recovering less than expected versus Q2, output up just 1.8%  quarter-on-quarter. The news from elsewhere in Euroland was better. Euroland confidence indicators were up on September’s readings, whilst French and Italian Q3 GDP numbers exceeded consensus estimates – and in France’s case considerably so. Just to throw some additional confusion into the mix, the French and German consumer prices data for October reported a further rise in the headline rates of inflation.

This week there are few interesting releases due. There will no doubt be some interest in the final October Purchasing Managers’ Indices; manufacturing due on Tuesday and services due on Thursday, but these releases are unlikely to offer much support or trouble to the EUR. In the absence of any important European announcements, FX markets are likely to be driven by announcements and data releases of far greater influence from other economies. The EUR economy might have troughed in terms of recent weakness, and consequently so might the EUR’s recent troubles, at least once this week is out of the way.

Central banks – Hikes from Eastern Europe this week after hikes from Kazakhstan, Brazil and Colombia last week

Last week’s central bank calendar was fairly significant, with the Canadian, and Japanese central banks leaving policy rates unchanged, along with the European Central Bank. There were a number of rate increases sanctioned however, with the central bank of Kazakhstan kicking things off unexpectedly increasing rates by 25 basis points to 9.75%. This was followed swiftly by a 1.5 percentage point increase in the Brazilian Selic rate to 7.75%, in line with consensus forecasts. However, Latin America wasn’t done yet, with the Colombian central bank hiking rates to 2.5% from 2% when only a 25 basis point hike was expected. It is clear that the rise in inflation is creating greater concerns amongst emerging market economies versus the developed world, but is what they are doing a portent of things to come?

This week, aside from the small matters of Federal Reserve and Bank of England monetary meetings, there are also meetings from the Reserve Bank of Australia (overnight Monday), Malaysian and Polish central banks on Wednesday, and Norway and the Czech Republic on Thursday. The vast majority of central banks are expected to remain on hold, in terms of official policy rates, but both Poland and the Czech Republic are expected to hike interest rates again. The National Bank of Poland is set to hike 50 basis points, when they meet, although the market isn’t quite pricing in that much, so it could prove zloty supportive. The Czech central bank is expected to hike rates by 75 basis points, although again the consensus is slightly below this. The inflation outlook for both Eastern European economies has worsened, and that is the main influence regarding the decision to tighten in recent months. 

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