What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: to unlock or not to unlock, that is the question!
Last week’s news on COVID in the UK was discouraging, in that the daily infection numbers continued to rise, and there were signs of increased hospitalisation rates, which will be of concern to health officials. Bearing this in mind, the prospect of a full unlocking of the UK economy on 21 June has been receding, and a number of ministers in the UK government have suggested as much in the past week.
As far as the economic data was concerned, the April monthly GDP (Gross Domestic Product) data reported a 2.3% month on month increase from March’s growth number which was unrevised at 2.1%. Services output led the way in terms of growth, up 3.4% month on month, whilst construction output and industrial production both fell in April. The figures suggest that the outlook for the UK economy will be heavily influenced by the process of unlocking, which if it is delayed could lower rates of expansion in later months.
Finally, the RICS (Royal Institution of Chartered Surveyors) house price survey recorded another very strong reading in May. At 83.1, this was the highest reading since the late 1980s, so more than a three-decade high, and demonstrative of a housing market that continues to operate with too little supply for the demand created. Moreover, the indications are that the UK residential housing market will continue to exhibit these conditions after the stamp duty holiday comes to an end.
For this week, the attention is likely to be on the labour market data for April and May, followed by consumer price inflation for May, and then May retail sales figures. The labour market data are expected to record a sizeable improvement in employment in April, whilst unemployment is expected to have dropped back. Inflation is forecast to have risen further in May, the headline rate forecast to rise to within a whisker of the 2% target. Finally, the retail sales figures for May are expected to record an additional gain in retail sales, but with non-essential services re-opening, in large part could spending have been diverted from retail to services, making a miss to the downside more likely?
As for the GBP, it rallied against the EUR, but fell back against the USD last week, after a strong performance in the early part of the week. Could this week see the pound under additional pressure? That will depend on how much of the still closed or restricted elements of the UK economy are allowed to fully re-open. The pound is still showing very limited appetite for a rise above $1.42 on a sustained basis, and could drop back if the UK authorities act more cautiously because of the rise in COVID daily infection numbers.
United States: core inflation hits multi-decade high; How will it affect the Fed this week
The inflation figures from the US last week were clearly the most important release for markets to focus on, and they did not disappoint. The headline rate of consumer price inflation rose to 5%, its highest reading since August 2008, when it read 5.4%. Core inflation rose to a 28 year high of 3.8%, and though both of the inflation readings are rising predominantly because of temporary factors, the Federal Reserve will be concerned about the rapid turnaround in CPI (Consumer Price Index) inflation over the past 6 months or so.
Last week also saw the US labour market record additional signs of strength, with the April JOLTS (Job Openings and Labor Turnover Survey) job openings data recording a further increase in openings, and that despite some disappointing non-farm payrolls data for the months of April and May. The jobless claims data also recorded a further improvement in the post pandemic labour market, but will that translate into stronger payrolls growth?
The Federal Reserve meeting this week is not expected to see the Fed change policy stance, but what will be of interest is the new set of predictions from Fed members about when policy will be modified. Will anybody join the outliers in predicting rate hikes in 2022, and will that imply that the taper of asset purchases will also come sooner than previously anticipated? Ahead of the Fed decision, there are the releases of May retail sales, producer prices and industrial production. Retail sales values could have shrunk in May, despite or because of the rise in prices seen recently, whereas industrial production is forecast to grow again. As for producer prices, could they grow by even more than consensus expectations?
Europe: ECB (European Central Bank) Governing Council sends markets a strong signal
The European Central Bank Governing Council meeting last week saw the forecasts for growth and inflation raised, but the Council were swift to downplay any risk of a reduction in the pace of asset purchases, which are now seen to be set in over the remainder of the summer. When the ECB do decide to alter the pace of asset purchases, they are likely to reduce the weekly purchases to a level below where they were raised from back in early Autumn, in my view.
There was precious little data or surveys released last week, but prior to the ECB meeting, the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for June did offer some food for thought, with the current situation index recovering far more than expected, but the expectations index dropping unexpectedly.
The EUR struggled in the aftermath of the ECB Governing Council meeting, with the risks of an earlier than expected taper having receded. Could there be more downside risk to come for the EUR this week?
With no important releases due from Euroland this week, attention will turn to events in the US. Could the Federal Reserve surprise in terms of its decision on monetary policy or the latest batch of dot plots?
Central banks: Mostly rates on hold last week, but a few surprises nonetheless
Last week’s central bank meetings were largely expected to leave monetary policy on hold, and that’s what we got. The central bank of Kazakhstan kept interest rates at 9%, but hinted of hikes to come if inflation persisted above target. The central bank of Chile were next to announce, and again rates were left on hold as expected. However, policymakers made it clear that the strength of recovery was inconsistent with previous forward guidance, which had signalled a hike to come in either late 2021 or early 2022.
The BoC’s (Bank of Canada) decision to leave policy on hold came as no surprise, and having reduced asset purchases previously, they were not expected to further reduce the pace at this meeting. However, the BoC Governor, Macklem, indicated that interest rates would likely begin to be raised at some point in the second half of 2022, whilst the pace of asset purchases could be reduced again in July. The National Bank of Poland also left policy on hold, playing down the risks from high inflation, signalling its intention to keep rates low for some time to come, in contrast to the central banks in Hungary and the Czech Republic who have suggested tightening to come.
The Central Bank of Russia hiked the key rate by 0.50 percentage points, as expected, but hinted at more hikes to come in the future, potentially as soon as the July meeting, as inflation continued to move further above target. The Central Bank of Russia think that the economy will recoup all of the lost output by the end of Q2, and that faster than expected recovery in output could tip the scales in favour of a move in interest rates to well above 6%.
This week, with the Fed meeting on Wednesday, there may not be a lot of interest in other central bank meetings. The Bank of Indonesia, Taiwan central bank, Swiss National Bank and Bank of Japan are all expected to leave interest rates on hold. Two meetings though could cause a stir. Firstly, the Brazilian central bank meeting on Wednesday is expected to see the Selic rate hiked from 3.5% to 4.25%, after the recent spike in inflation. They could hike by more, and that is the risk versus a smaller hike, given the improved economic performance viewed recently also. Then on Thursday, the Norges Bank meet. They aren’t expected to tighten this time around, but are expected to revise its rate path with the possibility of an earlier hike, in September. There are clear signs of economic normalisation, with a recovery in the labour market and the oil price rising beyond $70 per barrel. The Norges Bank may begin to be less comfortable with the monetary stance.
On Friday, the Central Bank of Russia meet and are expected to hike by 25 basis points. This move has been relatively well flagged. It is unlikely that the Central Bank of Russia will surprise the markets, but if it does, it would be because it raises by more than markets expect, rather than because it keeps rates on hold.
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