What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: Bank of England talks up economy and slows asset purchase pace
Last week saw the final April PMI (Purchasing Managers’ Index) surveys for the manufacturing and services sectors. Both were revised higher from the initial readings, suggesting that the UK economy had further increased its recovery momentum, particularly in services where the reading was the highest since the post financial crisis rebound, having suffered a further lockdown related drop only 3 months earlier. The data calendar was bereft of anything else important, and the markets did not sustain any upward momentum on the back of these releases in a holiday shortened week.
The attention from markets was directed more towards the BoE’s (Bank of England) latest meeting, and quarterly Monetary Policy Report. Though the BoE chose not to alter its stance on any monetary policy tools, they did slow down the pace of asset purchases (tapering). This suggests the purchases will last slightly longer than markets previously anticipated. The BoE revised down projections for consumer price inflation at both the 2 and 3 year horizons, albeit marginally, but revised up growth forecasts for 2021 and 2022. The forecasts had an inbuilt rate increase in them by the end of Q2 2023.
Finally, there was interest in the Hartlepool by-election, local and regional assembly elections and regional mayoral elections. In England, the Conservatives performed better than many expected, taking the Hartlepool by-election with a large margin of victory, and winning a number of councils from Labour or No Overall Control, in the Midlands and North. The complete picture was more complex, and GBP was fearful of the Scottish regional elections for Holyrood. The results of these elections reported a rise in the number of seats held by pro-independence parties in the Scottish parliament, and the SNP hinting to the media that they would look to legislate for a referendum in mid-2022.
For this week, the focus is likely to be on the Q1 GDP (Gross Domestic Product) figures on Wednesday. How will the UK compare to the US, which expanded strongly (c1.5% quarter on quarter) and Euroland which contracted by 0.6% quarter on quarter). Given the UK was in a more restrictive lockdown in Q1, the drop in GDP is likely to look unfavourable to both, but could the UK outperform consensus expectations?
As for the GBP, it rallied into the end of last week against the USD, and at the beginning of this week, but thanks more to events elsewhere and a pick up in risk appetite, rather than the fundamental releases or BoE decision. Against the EUR on the other hand it felt heavy, struggling to make headway. This week, even a stronger set of GDP figures might not offer sufficient reason for a sustained GBP rally, and it could be heading back lower against the USD in the second half of the week.
United States: US payrolls disappoint and vindicate the Fed
The US Federal Reserve has been at pains to remind markets that it is not envisaging any changes to the monetary stance for a prolonged period of time, with rate rises unlikely until after Q2 2022 at the very earliest. However, with much of the data and survey releases pointing towards a healthy improvement in the US economy, pressure had been growing on them. After April’s US non-farm payrolls data though the decision to leave interest rates on hold and asset purchases at the same weekly amount has been vindicated, with a tentative signal that the progress from here may be harder to achieve.
To summarise the labour market data, these reported a rise in net payrolls of just 266,000 versus expectations of a 1 million increase, whilst the unemployment rate rose from 6% in March to 6.1% in April. There was some good news in the form of a rise in the average hours worked and labour force participation. Whilst I would caveat that this is only one month’s data, I do wonder whether the markets are too expectant of a swift recovery, thereby setting themselves up for disappointment?
In terms of this week, the key releases from the US are likely to be the April consumer price inflation and retail sales figures released on Wednesday and Friday respectively. The likely outturn from these releases is that the headline and core inflation measures will further increase, whilst retail sales values will record a far more modest rise than that seen in March, when stimulus cheques did all of the heavy lifting in terms of spending.
For the US dollar, undermined by the payrolls release at the end of the last week, the prospect of a longer period of monetary loosening and lower yields doesn’t look positive for the currency, especially after the uprating of growth expectations in the UK. A lot may now hinge on the performance of the US economy in the second quarter, and so far it looks unimpressive.
Europe: ECB (European Central Bank) hints at slower asset purchases; mind the (closing) gap on vaccines/output?
There have been hints from members of the ECB Governing Council at the prospect of reducing the pace of asset purchases in June, having only recently stepped up the pace. This isn’t particularly surprising though, given that there has been an improvement in the economic outlook and other central banks seem far less troubled by rising yields. The European Central Bank is faced with a less impressive vaccine rollout thus far, but the knowledge that, realistically, the European Union is only a couple of months behind its major economic rivals, and so any delays to recovery will be relatively minor by the time we reach the end of the year.
Meanwhile, the data on COVID case numbers from Euroland has shown more signs that new infections have plateaued and are starting to decline. This could mean that in a few short weeks there will be a more significant lifting of lockdown measures, especially if the vaccine programme continues at its current pace. Once that drop in cases is seen, I would anticipate there will be a more pronounced bounce in the survey data. Even without this, last week saw the euro strengthen against the US dollar, thanks to some weaker data from the US at the end of the week.
This week’s data and survey calendar is a bit light, with the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for April released on Tuesday and then final April inflation data released on Wednesday from Germany and France. There will be interest in the European Commission’s economic forecasts due on Wednesday to see whether growth has been revised up or down, although the forecast should be up. How much, relative to revised projections for other major economies may be what really holds the interest. Will Euroland still be trailing behind the likes of the UK and US, or will some encouraging signs suggest they are closing the gap?
Central banks: Aussies hold, Brazil hike last week; what will Mexico do this week?
Last week saw the RBA (Reserve Bank of Australia) hold monetary policy, although there were signals that, with the economy recovering and the labour market improving, the RBA could change its stance on the bond buying programme as early as the July meeting. Meanwhile in Brazil, the central bank raised its target interest rate, the Selic, by 75 basis points, citing the rise in inflation and normalisation of policy as the major reasons for change. The Banco Centro do Brasil indicated that they would raise rates by a similar amount in June, if there had been no change in inflation forecasts. The decision to hike helped to support a recovery in the real against the US dollar, and it is now over 10% stronger versus its early March lows. There was no change from the central banks of Thailand, Poland, Malaysia, Norway, Turkey or the Czech Republic, although the Norges Bank reiterated that it stood ready to hike rates, if necessary, with the likely timing being late 2021 or early 2022.
For this week, we have the central banks of the Philippines, Mexico, Chile and Peru all meeting. None are expected to hike, but attention will be on Mexico to see what thoughts the central bank has regarding the rise in inflation pressures. If the Banco de Mexico indicate that they are preparing to tighten if inflation rates don’t drop back, that could add pressure to other central banks in the Central and Latin American economies. It looks increasingly unlikely that there will be any further stimulus from central banks, as the risks of inflation overshooting increases.
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