What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
And the band played on…
One of the comments about the sinking of the Titanic was that the band continued to play whilst the ship sank. To some extent that’s seemingly how the Brexit trade deal negotiations feel. Both sides have agreed to continue talking, whilst recognising that substantial differences still remain over key issues like state aid, a level playing field, court jurisdiction and fish. Some progress is being made, but talks were due to end weeks ago, and the progress that is being made is interminably slow.
The GBP has bounced around, falling and rising, as the markets become less, and then more, confident about the prospects for a deal, but will the end of the year deadline hold for a deal to be secured and ratified? The roll out of vaccinations for COVID-19 also began last week, providing some confidence for recovery as we head rapidly towards the close for the year and the beginning of 2021. Last week’s data and surveys pointed to further strength in the UK housing market, and a better October, in terms of GDP (Gross Domestic Product) growth, versus expectations. Overall though the data and surveys are insufficient to support any additional rally in the GBP, which is consumed by the turn of events on Brexit.
This week sees plenty of additional data released. On Tuesday we have the latest labour market figures, which are expected to record a further increase in unemployment and a drop in employment in the 3 months to October. Wednesday sees the November consumer prices inflation figures released, and these are likely to show a worsening in inflation rates versus the undershoot in October. Finally on Friday we have November retail sales released. One of the bright spots in the UK economy recently has been the strength of retailing, although November is likely to have proven much tougher, with non-essential shops shut for much of the month across England. Will the retail space have enjoyed a boom in online sales, especially with big discounting events coinciding with that month? The data of itself is unlikely to generate any sustained GBP strength, in my view.
This week also sees the Bank of England Monetary Policy Committee meeting on Thursday. No changes in interest rates are expected, and the quantitative easing programme is expected to remain at £895bn, having been expanded by £150bn in November. However, the BoE (Bank of England) might have more to say about the risks of a no deal on UK/EU trade post the end of the transition period, which could prompt some moves lower in the GBP, in absence of any deal news from negotiations. The BoE will keep their options open, and would act swiftly if there is a further negative shock risk to the UK economy over the coming weeks.
Holding up, but tougher restrictions loom in Germany
Last week saw comments from the German government to suggest that, with case numbers and deaths increasing, they were to toughen restrictions throughout the Christmas period until 10th January, only relaxing them temporarily from the 24th-26th December. This tightening of restrictions could adversely impact the largest European economy, and thus require additional fiscal loosening in order to compensate. The data and surveys from Euroland last week reported that the economy was, in general, bearing the renewed restrictions well, but that one important ingredient to the recovery was still missing. Consumer prices were still in the negative column, at -0.3% year on year, according to the November inflation data, and this is something that was, and is, a worry for the ECB (European Central Bank).
Speaking of which, last week saw the ECB expand its Pandemic Emergency Purchase Programme by a further €500bn, extending it to March 2022, and it extended the targeted longer term refinancing operations to June 2022, allowing for a further 3 operations to be conducted. There wasn’t a sense that the ECB had done more than expected, and there wasn’t any great positive or adverse reaction in markets to the announcement. The sense was that the ECB has left the door open to additional monetary loosening, if required, but it hoped that with multiple vaccines landing shortly, that this would prove unnecessary.
For this week, there are few releases or events to catch the eye. Market attention will likely remain focused on the UK-EU trade discussions, but with the markets unlikely to be given a deal to examine, there may be more interest in events across the pond, in the US. For the EUR, additional upside is unlikely to be domestically driven.
Stumbling towards additional fiscal support
Last week saw some movement in the discussions between the White House, House of Representatives and Senate on additional fiscal support for the US economy and local governments. The bi-partisan package of fiscal relief, worth $908bn gained traction with the White House, and US Treasury Secretary Steve Mnuchin, described discussions as encouraging, whilst pitching his own $916bn programme of measures. US Senate Majority Leader, Mitch McConnell, was optimistic about the prospects for the latter deal gaining support within the Senate Republican group, as it including some important guarantees for businesses over COVID liability. The USD remained under pressure, with the markets ignoring data and survey releases, as they are likely to in the run up to year end.
This week, the focus is on the Federal Reserve monetary policy decision, due on Wednesday. The minutes of the November meeting suggested that the Fed would look again at the level and speed of bond purchases to help support the US economy. Meanwhile, the Beige Book highlighted the pace of expansion was slowing, with the labour market showing signs of stress as well. So will the Federal Reserve loosen further, and will it be helpful to the recovery?
The coronavirus infection levels continue to hold at over 200k per day on average across the US, which could bring about a tightening in restrictions in early 2021. This will intensify the need for additional fiscal support, whilst the vaccine rollout gains critical mass. The US recovery is likely to only slowly gain traction in 2021, which could also prove negative towards the USD.
Any risks of loosening this week?
Last week’s central bank meetings, outside of the ECB’s, were dull affairs, with none of those scheduled to announce loosening policy from already ultra-loose levels. The Bank of Canada holds a watching brief over what its neighbour may choose to do this week, whilst the Brazilian central bank has some additional room for manoeuvre, but chose not to deploy it at this time, despite the challenges its economy continues to face.
This week’s meetings have already seen no change from the Kazakhstan central bank, as expected, but the bulk of the interest around central bank meetings occur towards the end of the week. On Thursday we have announcements from the central banks of Indonesia, the Philippines, Switzerland, Norway, the Czech Republic, Mexico and Taiwan. The Philippines is viewed as the only central bank possibly looking to ease policy further, but it is a close call between that and no change. On Friday, central banks from Japan, Russia and Colombia are all expected to leave monetary policy on hold, with the BoJ (Bank of Japan) waiting to see what additional stimulus the Japanese government is likely to offer.
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