FX outlook: Parky’s quick take – 17 May 2021

17 May 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 sees GDP (Gross Domestic Product) recovering more swiftly; April data in focus

The UK focus was on the release of the Q1 GDP figures, which took place last Wednesday. These reported a smaller than expected contraction in UK economic output in the first quarter, although at 1.5% it was still the worst performing major economy. The figures also contained a glimpse of what had happened post the first phase of the UK’s unlocking, and March saw output leap by 2.1% month on month. That was driven by a 1.9% month on month rise in services output, a 1.8% rise in industrial production and a 5.8% jump in construction output. The GDP figures aside, it was a relatively quiet week on the data and surveys front, although the April RICS (Royal Institution of Chartered Surveyors) house price balance leapt to its highest level since August 1988, as demand continued to outstrip limited supply in the residential housing market.

The announcements on the local election results seem now to be largely forgotten, although polling figures from some companies suggested that the Conservatives continue to enjoy an impressive lead over the other opposition parties.

The pound had a turbulent week, rallying at the beginning of last week, but dipping towards the end of it. The drop in the pound was driven by a risk appetite reduction, in turn prompted by a jump in consumer price inflation and a re-examination of tech stock valuations by fund investors.

This week sees the UK set to receive a number of updates on its economic performance. On Tuesday there is the March/April labour market statistics release due. On Wednesday, the April consumer price inflation figures are released. Finally, on Friday we get the GfK (Growth from Knowledge) consumer confidence survey for May, April retail sales data and the provisional May manufacturing and services PMI (Purchasing Managers’ Index) indices released. These should all indicate progress in terms of the UK’s economic recovery, whilst the inflation figures may record some cost push inflation creeping into the general economy.

Can the pound build on gains based on the outturns from this week’s data and survey releases? It is unlikely, given that market expectations for the UK economy have already shifted, in a more positive fashion, so the bar for the GBP, in terms of economic outperformance, is also higher. If GBP is to rally further against other majors, then it may be due more to the relative weakness of other economies. The FX markets will continue to watch equity market performance, after last week’s short-lived rout of technology stocks.

United States: Inflation surges but activity weak; Fed minutes in focus this week

What a week the US had. Last week saw a major pipeline subject to a cyber-attack, which prompted some gas stations to run out of fuel for vehicles. This was resolved, although only because the company paid the ransom to the hackers, according to reports. There was also a blockage of over 900 river barges on the Mississippi river, thanks to a crack being discovered in a bridge near Memphis. These logistics problems are likely to prove only a minor inconvenience, and the effects on growth temporary, but they demonstrate that it may not be a completely smooth recovery for the US.

In terms of data and surveys, last week saw the inflation figures for consumer prices and producer prices surge in the April outturns, but disappointing in terms of the activity data and sentiment surveys for April and May at the end of the week. Notably retail sales values stagnated in April, albeit from larger readings in March and the industrial production outturn in April disappointed as well, following upward revisions to March. The University of Michigan consumer sentiment reading slipped from 88.3 in April to 82.8 in May, leaving the US economy on a flat note heading into the weekend. The fears of the US Federal Reserve raising interest rates on the back of the surge in inflation, which prompted an additional risk sell off, was unwound into the weekend.

This week, the Federal Reserve’s monetary policy meeting minutes are released on Wednesday. The focus will be on whether any members of the Fed felt concerned by the news from the economy or the trend in inflation. Markets are likely to be expecting any dissent, so if there were some, it could prompt yields to rise and provide temporary relief to the USD, which remains under pressure. Ahead of the Fed minutes we have housing data in the form of the May NAHB (National Association of Home Builders) housing market index and April housing starts and building permits, and following afterwards are provisional May manufacturing and services PMI readings and the April existing home sales figures. There is nothing in these releases to shake the markets, but nothing to provide any lasting support to the USD either.

Europe: A lacklustre uprating of growth expectations?

Last week’s focus was on German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for May, and then the release of the European Commission’s new forecasts for growth and inflation. The German ZEW survey pointed to a further recovery in activity, with the current situation and expectations indices both rising from the April readings and also beating consensus expectations. The jump in the expectations index to 84.4, took the reading to a 21-year high. Swiftly following that release came the EU Commission’s latest forecasts. The fact that growth expectations for Euroland were uprated was not a surprise. However, the scale of the upgrade was a little disappointing, with growth for 2021 and 2022 well short of expectations for growth in the UK and US. The EU Commission’s Spring forecasts for Euroland growth were 4.3% and 4.4% in 2021 and 2022 respectively, up from 3.7% and 3.9% in its Winter forecast.

There was good news on the COVID front, with major economies announcing sizeable further reductions in the infection levels, as the effects of lockdowns and restrictions on social contact continued to bite. At the current rate of decline, the governments of France and Germany might be able to begin loosening restrictions as soon as the end of May or early June, if they deem this suitable. With vaccination rates continuing to climb in these countries as well, the risks of a return to lockdowns in these countries is also seen receding.

This week, there are revisions to the Euroland Q1 GDP figures, although consensus forecasts suggest there will be no change from the initial reading of a 0.6% quarter on quarter contraction. More interest will be on the preliminary May Euroland manufacturing and services indices released on Friday. There is a reasonable prospect of the Euroland services PMI increasing further above the 50 reading, indicating a faster recovery in the sector. That could prove beneficial to the EUR, as it attempts to make further headway against the USD.

Central banks: On hold against the backdrop of higher inflation

Last week the central banks of the Philippines, Mexico, Colombia & Peru all met, and left policy on hold. The meeting that was of greatest interest to the financial markets was the central bank of Mexico, where there were concerns about the pick-up in inflation. As that turned out, the central bank unanimously agreed to leave monetary policy unchanged, continues to expect high inflation to be transitory, and whilst the growth outlook was marginally improved, this was not viewed as altering the outlook for interest rates materially.

This week is a relatively quiet week on the central banking front, with only the South African Reserve Bank due. The meeting is not expected to see any change in monetary policy, with inflation so far still under control, and signals of rising COVID cases a downside risk to the growth outlook. There has been some recent strength in the rand over the past couple of months, and that also alleviates any need for a tightening of monetary policy, unlike what has been seen in other emerging market currencies.

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