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

18 October 2021

Neil ParkerFX Markets Strategist

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Neil Parker, our FX Markets Strategist, shares his views on the currency markets this week

UNITED KINGDOM: Sterling holds, inflation and PMI eyed

On Monday GBP/USD was holding most of last week’s gains above 1.37. The UK has been the epicentre of tension between earlier rate moves and policy mistake fears. Last week’s softer-than-expected Gross Domestic Product (GDP) data failed to have a negative effect on the pound, but it did call into question whether the Bank of England (BoE) would be wise to adjust interest rates at this juncture. Monetary Policy Committee (MPC) members Mann and, to a lesser extent, Tenreyro pushed back on early rate hike expectations last week. Nevertheless, a rate hike by the end of February still appears a live discussion, in my view. In the context of reversing pandemic stimulus as output normalises, whether this is a policy mistake will likely impact Sterling.

This week is a major week for UK economic data releases with inflation, Purchasing Managers’ Index (PMI) surveys and retail sales, which could shed further light on the impact of recent supply chain issues on economic recovery and their implications for the BoE’s monetary policy outlook.

UNITED STATES: USD pares some losses amid growing inflation concerns

The USD ended last week with a loss, but pared some of last week’s losses at the start of the week amid growing inflation worries due to surging energy prices and slowing Chinese growth (after the release of weak Chinese economic data on Monday). Last week’s consumer price inflation figures for September reported a rise in the headline rate from 5.3% to 5.4% year-on-year. However, that wasn’t particularly surprising, as the risks associated with supply chain disruption were always to the topside. The dollar wasn’t impacted much by the slightly higher than expected inflation data. The Federal Open Market Committee (FOMC) meeting minutes released this week further signalled a start of tapering (cutting asset purchases) in mid-November. Tapering increasingly feels like yesterday’s news. With energy prices surging and increases looking less transitory, focus seems to have shifted away from the timing and pace of taper and towards the timing of the Fed’s first rate hike, which could be the main driver of the USD movements, in my view.  Given the assumption that the Fed might feel a strong institutional inertia against tightening the Fed Funds rate before the completion of the taper, taper details (and specifically, the end of the taper) appear most useful at this point for setting a timeline for when the Fed’s first rate hike may occur.

This week is relatively light on economic data, with the focus on manufacturing and housing, as well as Fed’s Beige Book on Wednesday. A decent amount of Fed officials (including Quarles, Kashkari, Daly, Bostic, Waller, Evans, Bullard, Williams and Powell) are scheduled to speak this week and could provide further signals on taper details.

EUROPE: EUR/USD hovers around 1.16 ahead of a heavy data week

EUR/USD is trading at around 1.16, holding most of last week’s gains against the dollar. Last week’s economic data showed a slowdown in the region’s economic recovery. German ZEW survey for October undershot market expectations, while the region’s industrial production data for August also recorded a sharp drop in output, but not quite as bad as market expectations. The supply chain disruption could be the main contributing factor of the region’s worsening economy. The central bank speakers last week continued to downplay the risks to inflation due to these disruptions, suggesting that they are not in a rush to change their easing monetary policy stance. The European Central Bank (ECB)’s Visco also suggested on Monday morning in a Bloomberg TV interview that monetary policy will remain accommodative.

This week will see the release of September inflation data and October preliminary PMI data, which could provide further insight on the region’s economic condition. ECB speakers (including Lane, Villeroy, Elderson and Holzmann and more) are set to speak this week and will likely share their views on the policy outlook.

Central Banks: Indonesia, Hungary, Turkey, Russia decisions

The Bank of Korea held policy settings unchanged last week, but Governor Lee Ju-yeol reiterated in a parliamentary session that a November rate hike is possible in the absence of specific risks. The central bank of Chile hiked the benchmark rate by 1.25% to 2.75% last Wednesday, and their forward guidance suggested there is more to come.

This week will see several central bank meetings in emerging markets. The Central Bank of Russia will likely hike rates by 0.25% to 7% amid a high inflationary environment. Similarly, the National Bank of Hungary will likely raise rates by 0.15% driven by high inflation. Guidance from Deputy Governor Virag also continued to suggest tightening is on the cards to address the rising inflation. In the meantime, Bank Indonesia might stay on hold given that inflation remains below target and the currency has continued to perform well aided by higher energy prices and attractive carry. The Central Bank of the Republic of Turkey is in a completely different camp however, as the economists are expecting a 0.75% rate cut (according to a Bloomberg survey), after President Erdogen fired three monetary policy makers who were wary of reducing policy rates last week.

View last week’s Quick take.

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