FX outlook: Parky’s quick take – 15 February 2021

15 February 2021

Neil ParkerFX Markets Strategist

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What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

United Kingdom: UK GDP falls the most since 1709, but it could have been worse

Last week saw the GBP rally to fresh 2½ year highs against the USD. There had been a general improvement in risk appetite, and the markets were still digesting the news that the Bank of England had downplayed the need for negative interest rates. However, it was general USD weakness that was the key driver.

From a data and survey perspective, the key releases came on Friday, with the UK GDP (Gross Domestic Product) release for Q4. This reported growth of 1% quarter on quarter, more than the market consensus expectation, but that still left output 9.9% lower than 2019, the largest fall since 1709, which was during the great frost. That was bad, but it could have been worse. However, the breakdown of the GDP growth boded ill for 2021, since services activity had rebounded far more than expected and industrial production far less in Q4. Q1 has seen forced closures of services businesses, which could significantly cut output, and by far more than it expanded in Q4.

By the end of last week, the vaccine rollout had seen more than 15m people receive their first jab, and that despite weather-related disruption to the mass vaccination programme, meaning that the government had met its first target. The Prime Minister, Boris Johnson, will outline the government’s roadmap for unlocking the UK economy. That will come at the beginning of next week, by which point the UK should have vaccinated more than 18m. That could provide additional optimism to the financial markets, and offer the pound more support. It is unlikely to provide firm dates to move to the next phase though, as the metrics on infections, hospitalisations and deaths will be the determining factors. 

The week ahead has a lot of key releases due from the UK. On Wednesday, January consumer price inflation figures are expected to record little change in headline or core inflation pressures versus December. Friday sees January retail sales, public finances and February PMI (Purchasing Managers’ Index) surveys due. January retail sales are expected to have been awful, volumes down around 2.5% according to market consensus, prompting by the closure of non-essential retail stores. Public finances are expected to see overall borrowing levels down from December, but only thanks to quarterly tax receipts coming due. As for the preliminary February PMIs, manufacturing is expected to have dropped a little but remained above 50, indicating a slower expansion versus January, whilst the services reading is likely to have increased a little, but remain well below 50, indicating a smaller, though still sizeable, contraction. The data might provide a counterbalance to the optimism around the UK economy’s potential unlocking, and limit any further upside for the GBP, independent of general USD weakness.

United States: US impeachment leads to acquittal; Biden looks to stimulate economy and accelerate vaccine rollout

Trump’s impeachment hearing concluded over the weekend. The Senate voted to acquit, with not enough Republican Senators crossing the Rubicon to get the two thirds of Senate votes in order to convict. The distraction of the impeachment hearings now over, the Biden administration will want government to focus exclusively on healing the economy and vaccinating the vulnerable. That will provide the greatest boost to his administration, and likely help to heal the nation.

In terms of the fiscal stimulus, the $1.9 trillion programme of relief is set to be put into legislative text, such that the House can vote on it the week beginning the 22nd February, with the Senate to vote on it thereafter. However, there is still the issue over Biden’s hike in the minimum wage to $15 an hour, which is set to be phased in over the first term of Biden’s Presidency, a move which is opposed by at least one moderate Democrat Senator. Could the stimulus bill fail on this? Would the administration look to modify plans ahead of a Senate vote to avoid this?

The pressure on the USD persists, with concerns over the level of fiscal spending and monetary loosening not helped by weaker data and surveys last week. The weakness in consumer confidence was evidenced by the provisional February University of Michigan consumer sentiment reading. The USD remains under pressure against the GBP, less so against the EUR and some other majors.   

This week, January producer prices, retail sales and industrial production figures are all released. These should indicate that the pressure on the US economy persists, with the retail sales data likely to only part of December’s losses, and industrial production expected to grow much more slowly. The housing market releases for January may also show signs that it is coming off the boil, as some of the surveys have suggested. It’s unlikely the data will offer the USD any fundamental support.

Europe: Europe struggles to lift vaccination rollout; German and Euroland survey data in focus

European Commission President, Ursula von der Leyen, finally admitted last week what the markets have known for a long time. The delays to signing vaccine contracts, lethargy in the approvals process for vaccines and problems with the administration of actually vaccinating the population of the EU had left the bloc a long way behind where they had hoped to be. The EU still hopes to have 70% of its population vaccinated by the end of the summer, but that could leave the region a long way behind in terms of the economic recovery, versus the likes of the UK and US.

With limited data and survey releases last week, there was little to support the EUR, and though it rallied against the USD, it made no consistent headway against other majors. The struggle for the EUR comes because of the ongoing stuttering vaccine programme, but also signs from other industries of concerns over supply chain disruptions, because of COVID restrictions and intra EU border delays.

This week sees the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for February and the Euroland Q4 GDP outturn released ahead of the end of the week’s preliminary February PMIs for manufacturing and services. The German ZEW is expected to show only a modest weakening in both the current situation and expectations readings, but the current situation reading might be a lot worse. The Q4 GDP reading is expected to contrast with the UK and US expansions, recording a 0.7% q/q fall. As for the PMIs, a bounce in services activity will likely contrast with a small fall in manufacturing activity. Until the Euroland economy unlocks though, that is likely to keep the economy contracting, which will delay the recovery of all of the pandemic-led lost output.   

Central banks: Mexico cuts but Russia suggests easing cycle is over

Last week was more interesting than expected in terms of central bank activity. The Swedish Riksbank left the repo rate at zero, but also suggested it would remain there until 2024. They also maintained their asset purchase programme of SEK700bn. The Philippines central bank kept interest rates on hold also, but in the face of rising inflation pressures that wouldn’t have been a straightforward decision.

Towards the end of the week, the Mexican central bank unanimously voted to cut interest rates from 4.25% to 4%. The decision was expected but the unanimous vote was not, which prompted the markets to speculate that interest rates would continue to be lowered over the remainder of the year, to an eventual low of 3.5%. The Peruvian central bank left interest rates on hold as well, and that left just the Russian central bank to announce. They also left interest rates on hold, but the Governor Elvira Nabiullina indicated that the potential for monetary easing was exhausted. They expected the economy to return to pre-crisis levels later in 2021, which may prompt some monetary tightening later in 2021, or early 2022.

For this week there are two big central bank meetings. Both announcements are on Thursday, with the central bank of Indonesia followed by the central bank of Turkey. In Indonesia, weak inflation and uncertainty over GDP should prove sufficient to prompt a cut in rates to 3.5% from 3.75%. In Turkey, with the currency and inflation seemingly more stable, there is no additional need for rate hikes, but the central bank will maintain a hawkish tone, threatening further tightening if inflation picks up and/or the currency weakens once again.

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