FX outlook: Parky’s quick take – 16 August 2021

16 August 2021

Neil ParkerFX Markets Strategist

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UK Q2 GDP grows 4.8% as services growth exceeds expectations

Last week was all about the economic growth numbers from the UK for the second quarter. These reported a robust recovery in output, with growth of 4.8% q/q1 following Q1’s 1.6% q/q contraction. Services grew by 5.7% q/q, that after a jump of 1.5% m/m2 in the month of June alone. Industrial production and construction output both fell in June, by 0.7% and 1.3% m/m respectively, which is why the economy only grew by 4.8% in Q2, and by 1% in June. In terms of the limited other releases, the British Retail Consortium Sales Monitor for July recorded a drop in sales values growth to 4.7% y/y3 from 6.7% in June, whilst the July RICS4 house price balance dropped slightly less than expected, to 79% from 82% in June.

There were signs of a renewed increase in COVID cases in the UK over the previous week, but the number of hospitalisations and deaths so far are relatively stable. However, if there is a further increase in COVID numbers and additional pressure on the NHS in some areas that could prompt new restrictions to be introduced. The rise in cases may, in part, have been responsible for some of the pressure on the GBP that came towards the end of the week, with GBP/EUR dipping beneath €1.18, and GBP/USD testing $1.38, since arguably the economic data and surveys were generally GBP supportive.

For this week, the attention will be on UK labour market data for June/July, and consumer price inflation and retail sales volumes data for July. The labour market figures are expected to record a further sharp increase in average earnings in June, a sharp additional rise in employment and a possible drop in the unemployment rate (although that would go against the consensus forecast). As for consumer price inflation in July, this is expected to record a dip in the headline and core readings, whilst producer price inflation is expected to hold at levels reached in June, after a drop in rates from May’s peak.

The outlook for the economy continues to improve, but will that be sufficient for a rebound in the pound against other majors? Given how elevated the pound is already against the EUR, having reached fresh 18-month highs last week before dropping back, it may be difficult for any renewed strength to be maintained.

US inflation figures show some overshoot; retail sales and Fed minutes

Last week’s US inflation figures for July were a mixed bag. Firstly, the consumer price inflation data recorded only a modest drop in the core inflation rate, but the headline rate remained at decade-plus highs. However, the producer price inflation figures recorded an additional rise in the headline PPI5 rate, to a new decade-plus high. That suggested there might be a renewed increase in the headline and core US inflation rates as this passes through the price chain.

Meanwhile, the jobless claims data recorded a drop in initial and continuing claims in the latest weekly data recorded, and the July monthly budget statement reported a marginally larger amount of borrowing than expected at $302.1bn, but the biggest surprise was the further collapse in consumer sentiment in the US in the provisional August University of Michigan release, which reported the index dropping to almost a decade low (worst reading since December 2011).

The Federal Reserve has indicated it is preparing to begin the process of reducing the level of monthly asset purchases. Whilst most of the data and surveys confirm that this would be the right move, surveys such as this latest consumer sentiment release will introduce a little doubt into the central bank’s mind.

Also last week there was agreement amongst Senate Democrats to push through the largest component of Biden’s infrastructure, climate change and social reform measures. Totalling $3.5bn, the Senate voted 50-49 in favour of the measures, which will now be reviewed by Congress ahead of a vote in the week beginning 23rd August.

For this week, the markets will concentrate on retail sales and industrial production releases for July, as well as the 28th July FOMC6 meeting minutes. The data should report strength in industrial production but also weakness in retail sales, whilst the Fed minutes should offer greater insight into any concern that is building over inflation. The data and minutes shouldn’t offer the USD any additional support, and asset markets remain seemingly receptive to further risk appetite improvement, which tends to be USD negative.

Euroland surveys and data disappoint; EUR remains under pressure

Last week’s survey data from Euroland were disappointing. The August Sentix investor confidence index kicked things off and was weaker than expected and weaker than the July reading, dropping to 22.2 from 29.8. That had come only shortly after the Bank of France industrial sentiment index for July recorded an unexpected drop as well. The German August ZEW survey was also weaker than expected, with the current situation index rising less than expected, whilst the expectations reading fell from 63.3 to 40.4, the third consecutive drop in that index and now below half the May 2021 peak, its lowest level since November 2020. There was also weakness in French Q2 unemployment figures, but that was likely due to the renewed restrictions reintroduced in France as the Delta variant took hold.

This week, there are limited data and survey releases due from Euroland. Revised Q2 GDP figures and Q2 employment data from Euroland is likely to be of most interest for the FX markets, although there are also June construction output, and final July consumer price inflation data due.

The EUR was under pressure for most of the last week but seemed to turn at the end of the week against the USD and GBP. Can it sustain the recovery, or is it set to lose the limited newfound strength it enjoyed on Friday? The improvement in risk appetite exhibited in other asset markets might suggest there is some upside to come.

Central banks – hikes from Mexico and a surprise from Peru last week; tightening from RBNZ and hints of hikes from the Norges Bank

Last week’s central bank calendar saw meetings from the central bank of the Philippines, Mexico’s Banxico and Peru’s central bank. The expectation was that the central banks of the Philippines and Peru would leave policy on hold, but that Banxico would hike a further 25 basis points. The central banks of the Philippines and Mexico delivered against expectations, but the central bank of Peru surprised with a 25 basis point hike. The decision from Banxico was down to a higher inflation projection, which indicates that there will be further hikes in the meetings to come. It was similar with the central bank of Peru, with high inflation and a persistently weakening Peruvian Sol providing sufficient reason for the hike and also further increases to come.

For this week, amidst relatively few announcements again, we have the prospect of tightening from the Reserve Bank of New Zealand. The RBNZ are first to announce, and early on Wednesday morning they should raise the cash rate from 0.25% to 0.5%. An improved outlook for activity and stronger inflation contrast with fears of new lockdowns and restrictions with the Delta variant still a risk, given outbreaks in Australia. It is likely the improved economic outlook wins the argument, and the RBNZ could hike interest rates again before the end of the year. The Bank of Indonesia meet on Thursday and are expected to leave policy unchanged. The Governor, Warjiyo, has made it clear that the BoI will wait for the Federal Reserve to hike before it pulls the trigger. Finally, Norges Bank are set to signal a hike to come in September, amid the improvement in the economic output, and pick up in employment.

1 q/q quarter-on-quarter
2 m/m month-on-month
3 y/y year-on-year
4 RICS Royal Institution of Chartered Surveyors
5 PPI Producer Price Index
6 FOMC Federal Open Market Committee

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