FX outlook: Parky’s quick take – 18 January 2021

18 January 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 vaccinations pass 3 million amidst signs that virus spread is slowing

The UK has made a very strong start to its vaccination programme. Over 3 million vaccines had been administered by the end of last week, and the programme continues to expand so as to meet the target of vaccinating the elderly and clinically vulnerable. The government have tightened the lockdown rules, with restrictions/travel bans introduced on travellers returning from Latin America, Portugal and Cape Verde, after concerns were raised about a new Brazilian variant of COVID. The government has also stated that travellers will require to have a negative PCR (Polymerase chain reaction) test result from less than 72 hours prior to travelling or face a fine on entering the UK. There has been some limited positive news, with signs that the latest lockdown has succeeded in slowing the spread of the new variants of COVID-19 effort, according to the daily infection numbers.

There was also positive news on the economy front, with signs that the housing market remained in robust health in December, according to the Royal Institute of Chartered Surveyors. The December like for like retail sales values from the British Retail Consortium reported a dip in pace of growth, but not the slump that some had anticipated. Finally, the GDP (Gross Domestic Product) figures for November reported a smaller than expected contraction, associated with the four week lockdown in England and a tightening of restrictions in Scotland, Wales and Northern Ireland. The drop in output was 2.6% month on month, whilst consensus was for a 4.6% drop, with the drop in services activity smaller than forecast, and the rise in construction output larger than expected. Overall, the news didn’t support a rally in the GBP, but probably helped in its outperformance versus the EUR.

This week, the data calendar includes December consumer price inflation figures, retail sales volumes, public finances and the preliminary January manufacturing and services PMI (Purchasing Managers’ Index)  indices. Consensus forecasts are for a rise in headline and core inflation, a rise in government borrowing versus November, stronger retail sales, but weaker activity in the PMI readings. Overall, the effects of the lockdown will be felt for another month or two at least in terms of subdued services activity. For the GBP, short term moves are likely to be in part determined by how bad the additional contraction will be versus expectations and versus other countries?

Europe: Dutch coalition resign; ECB (European Central Bank) meeting in focus

Last week saw the German government consider widening the scope of the lockdown to include schools, as case numbers and deaths remained elevated. The French government announced they would extend the curfew across the country from 6pm until 6am as bringing the rates of virus transmission continued to prove difficult. In Germany, the CDU (Christian Democratic Union of Germany) chose Armin Laschet as Angela Merkel’s successor. Mr Laschet was viewed as the continuity candidate, having been a strong support of Frau Merkel since she took over in 2005. The political news was tainted by the announcement that the Dutch coalition government had fallen apart over a dispute over childcare benefits. This came after a parliamentary committee ruled that the government had falsely accused thousands of parents of making fraudulent claims. The parliament was set to be dissolved soon ahead of elections in March, so the Prime Minister, Mark Rutte, will remain in a caretaker capacity ahead of those elections.

The news from the Euroland economy was mixed, with much better than expected aggregate industrial production figures for November, but no signs of improvement in terms of deflationary forces from the main economies in December. The Spanish inflation figures worsened marginally, making the job of the European Central Bank slightly harder than it already was.

The ECB meet this week, but having made further adjustments to the monetary policy stance recently, it is not expected that they will add to the programme of loosening just yet. Ahead of that, German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey figures for January are released on Tuesday, and, post the meeting, preliminary January Euroland manufacturing and services PMI indices are due. The figures are only likely to demonstrate that greater obstacles stand in the way of Euroland’s recovery, and that could signal additional monetary loosening from the ECB in the months or quarters to come.  

United States: US President-elect launches $1.9 trillion additional stimulus package

US President elect, Joe Biden, announced last week that he would push for an additional fiscal stimulus package of $1.9 trillion once he takes office officially on the 20th of January. The package includes $1 trillion for US households, with additional stimulus checks of $1,400 per American, $415bn for the fight against the virus and $440bn for small business support. Given the make-up of the House and Senate, the support package should pass, if all members of both chambers vote along party lines. Last week also saw US Federal Reserve Chairman, Jerome Powell, make remarks at a Princeton University web symposium. He made it clear that now is not the time for the Fed to even be talking about exiting the $120bn per month bond buying programme. Moreover, he suggested that any such move would be flagged well in advance. The Fed may even have to consider using additional measures, given how far away inflation, output and unemployment are from target. The economic problems the US is facing were highlighted in the latest Beige Book, ahead of the 27th January FOMC (Federal Open Market Committee) meeting. 

Last week’s data releases reported some increase in inflation pressures, and growth in industrial production in December, but weakness in retail sales, and January manufacturing and consumer sentiment surveys also deteriorated.

This week sees limited data and survey releases of any note from the US. Perhaps the most interesting data will come from the housing market, with the January NAHB (National Association of Home Builders) housing market index and December housing starts and building permits released on Wednesday and Thursday respectively. The US housing market has been one consistent area of strength, but will it have remained so as restrictions and enforced business closures deepened across the vast majority of the US?     

Central banks: Romania surprises with a cut

Last week, the Polish, Peruvian, and South Korean central banks left monetary policy unchanged, as expected. However, in a surprise move, the Romanian central bank agreed to reduce interest rates by 0.25 percentage points, to 1.25%, which still leaves Romanian rates the highest of the European Union. The decision was taken after assessment of inflation indicated it was likely to remain subdued for the foreseeable future. The problem across continental Europe remains one of a lack of inflation, and that offers up the prospect of additional loosening in the coming months and quarters, even if, as expected, mass vaccination programmes gather momentum. It may take a number of quarters, if not years, for the effects of the loosenings undertaken to fully take effect, and central banks have set themselves a higher bar to overcome before they look to begin the reversal of these policies.

This week sees the markets awash with central bank decisions. Most of these are expected to deliver no change in monetary policy. That includes the Canadian, and Brazilian meetings on Wednesday, and the Norwegian, South African, Indonesian and Japanese meetings on Thursday. The two meetings where there could be moves are the Malaysian central bank meeting on Wednesday and the Turkish central bank meeting on Thursday. The Malaysian central bank could cut interest rates by a further 0.25 percentage points, with a new lockdown heightening the risk of a further GDP contraction. As for the Turkish central bank, they’ve hiked in both of their previous meetings, and whilst the risk is that they hike again, recent reductions inflation expectations gives them cause for optimism, and the potential to pause in the hiking cycle. 

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