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

17 May 2021

Neil ParkerFX Markets Strategist

View bio

Other insights

View more insights

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.

To read the previous quick take, click here

To visit our FX Hub, click here.

FX
Markets
Economy
Brexit
Coronavirus


This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2021 © NatWest Markets Plc. All rights reserved.