What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: GBP suffers a significant setback
Last week saw the pound come under a lot of pressure against the US dollar and euro towards the back end of the week, and not for any particular fundamental reasons. The main driver for the pound’s weakness came from the news that the UK health regulator, the MHRA (Medicines and Healthcare products Regulatory Agency), advised that under 30s should be offered an alternative to the Oxford/AstraZeneca vaccine, after further analysis of the blood clotting risks versus the risks from COVID in this age demographic.
The UK vaccines programme also saw a sharp reduction in first doses given over much of the course of last week, as the numbers of second doses continued to rise sharply. The outlook for first dose vaccinations in April was known to be tricky in April, with delays to supplies from India already flagged. There was good news though, with the rollout of the Moderna vaccine beginning in Wales, and positive noises around other vaccines such as Valneva, which has been seen to produce a robust immune response.
Of the data and surveys that were released last week, there was positive news on the housing market and construction front from the RICS (Royal Institution of Chartered Surveyors) March housing survey, and the Halifax house price index for March, both reporting higher prices than in February, and the CIPS (Chartered Institute of Purchasing and Supply) construction PMI (Purchasing Managers’ Index) for March, reporting far stronger than expected activity. The strength in the construction PMI was likely the industry catching up on a backlog of work, so we’ll have to wait to see whether it is maintained. However, the signs are increasingly encouraging regarding the pace of any rebound in the UK.
This week’s important data releases are crammed into tomorrow’s early release of February industrial production, index of services, GDP (Gross Domestic Product), construction output, and balance of trade figures. The big question is whether the UK grew or shrank in February, with market consensus expecting a small recovery (approximately 0.5% month on month or around 1/6th of the January decline). If the recovery was larger than expected, the momentum behind the Q2 rebound could be enormous, suggesting a larger bump in growth than currently anticipated.
For the GBP, the outlook remains clouded by the vaccine delivery, but there is potentially some upside for the GBP as the numbers of first doses administered did pick up towards the end of last week. If that persists, then the pound could recoup some further losses against other majors, in my view.
United States: Fed Beige Book and data blitz to focus on markets attention
Last week was relatively quiet on the US data and surveys front. There was a strong outturn from the ISM (Institute for Supply Management) services reading for March, which at 63.7 was the highest reading since records began in 1997. There was also a massive spike in consumer credit in February, which grew by a net $27.58bn against expectations of a $2.8bn rise. That was perhaps prompted by the re-opening of the economy and the prospect of more stimulus cheques being on the way. The only disappointment was the latest week jobless claims data, which pointed to some weakness in the labour market. Jobless claims remain elevated, at around double their pre-pandemic level. That is possibly one of the reasons why the Federal Reserve minutes reported widespread support for Fed Chair Jerome Powell’s position of caution on monetary policy.
The dollar didn’t fair particularly badly, but didn’t do that well either, except against the GBP. The markets are still flip-flopping on risk appetite, and bond yields, having risen aggressively, are finding it harder to push higher, after sharp increases in the past few months. Can the US dollar make further headway from here?
This week’s Fed Beige Book will provide the markets with an insight into the US Fed’s views on economic performance, but Chairman Powell has already allayed any fears of an early move on monetary policy after an interview with CBS’ 60 Minutes was broadcast on Sunday evening.
As for the data and surveys, Tuesday sees March consumer price inflation figures released, which are expected to report another jump in headline inflation. Thursday sees March retail sales and industrial production figures released both of which are already expected to report sizeable gains. The provisional April University of Michigan consumer sentiment reading on Friday might be the release that surprises, with a jump in confidence seen in other surveys potentially reflected in this, as the economy continues to reopen.
Enough to support a US dollar rebound? Possibly not, with building confidence in the global recovery likely to act against the USD.
Europe: Euroland sees vaccine delivery increase; German data in the spotlight
The news on vaccinations given in mainland Europe was more positive last week. There was a definite increase in the pace of doses given, with the gap closing between the UK and European Union, as the pace of first doses in the UK slowed down, to make way for second doses. The European Union vaccinated over 2.5% of its population in a week, (Saturday 3rd April to Friday 9th April) an increase of over 0.8% on the previous week’s numbers.
If the European Union can maintain or even increase the pace of vaccine doses given, that should allay some fears regarding the economic recovery, and could offer support to the euro. However, a lot will depend on the EU’s ability to further increase the pace of vaccine production, or it may face the same issues that the UK is with regard to transferring from giving first doses to second doses, as they become due.
Last week also saw the French government submit a plan for reducing its fiscal deficit, but much more slowly than they did in the previous crisis. The plan is to get back below a 3% deficit as a percentage of GDP only in 2027, and is barely expected to improve in 2021. Will that be acceptable to the European Commission, when it is presented to them later this month?
This week has already seen the release of stronger than expected retail sales from Euroland for the month of February, building the case for a smaller fall in output than previously expected in Q1, and a stronger recovery in Q2.
Tuesday sees the release of the April German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey. This is expected to record a recovery in the current situation and expectations indices, but it will be the extent of the pick up in the current situation index that will be of greatest interest. Will that show only limited improvement, and if so what does that mean for the momentum of recovery in the beginning of Q2?
Also of note is the news that the German CDU/CSU (Christlich-Demokratische Union/Christlich-Soziale Union) Alliance will pick its candidate for Chancellor in the September General Election. With current Chancellor Angela Merkel standing aside, and the CDU/CSU heading for its worst performance in an election since prior to reunification in 1990, this may get more attention than normal. If the Greens continue to make gains in the election polling, will that mean an end to the black zero fiscal policy that has been the bedrock of German policy?
Can the EUR build on gains made against the USD and GBP last week, or will there be another failure to capitalise and a pull-back in the EUR’s value? The fundamentals might not be sufficient to support more gains for the EUR, but improving vaccination news might be!
Central banks: No changes last week, Turkish central bank meeting key this week
Last week there was no change from the Reserve Bank of Australia, but it indicated it would undertake further bond purchases to prevent additional rises in yields across the curve. The Reserve Bank of India also left interest rates unchanged, but joined the bond buying or money printers club, with a plan to purchase 1 trillion rupees of government bonds in Q2. The plan, known as the Government Securities Acquisition Programme, or GSAP, could extend and expand, dependent on the performance of the Indian economy, which shrank by almost 7% in 2020. Any rebound will be driven by the outlook with regard to COVID, and recent infection numbers suggest the virus is surging once again. The only other central bank meeting was in Peru, where interest rates were left unchanged despite the recent spike in inflation.
This week, there are several interesting central bank meetings. Wednesday sees the Reserve Bank of New Zealand announce. Whilst the economy has recovered solidly, the central bank is likely to maintain its commitment to accommodative monetary policy, given the uncertainties around the global recovery and any new COVID outbreaks. Thursday sees the central bank of Turkey take centre stage. Whilst the central bank should raise or lower interest rates, the new Governor may have already felt the heat from President Erdogan, given his penchant for removing Governors who displease him. Could a surprise cut be on the cards, if there was a cut, that could prove damaging to lira sentiment. Finally, the central bank of South Korea meet later on Thursday. They aren’t expected to move interest rates either, but with inflation heading back towards pre-pandemic levels, there could be signals of a hike to come!
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