FX outlook: Parky’s quick take – 19 April 2021

19 April 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: GBP under pressure despite better GDP (Gross Domestic Product) figures; UK awaits big data week

Last week got off to a slow start, with the markets waiting for the UK monthly GDP figures to be released on Tuesday. When they came, GDP was recorded growing slightly less than the expected outturn for February up just 0.4% month on month, but crucially the drop in January was less severe, down 2.2% versus the 2.69% previously estimated. That meant the UK was on track to have a less severe contraction in output in Q1, despite the lockdown for much of it. Prior to the February GDP figures, the British Retail Consortium released their March like for like sales values data. This reported a sharp improvement, with sales values up 20.3% year on year, having been up 9.5% in February. As the UK consumer again adjusted to life under lockdown, some retailers with a heavy online presence were clearly outperforming their peers.

Also last week was the Bank of England’s Q1 Credit Conditions Survey. This pointed to a surge in the availability of secured credit to households in Q1, with more likely to be available in Q2, whilst unsecured credit availability fell marginally in Q1, but was expected to increase in Q2. In terms of demand, it fell or was flat in Q1 for secured and unsecured borrowing, but was expected to recover in Q2. Funding demand from, and supply to, corporates was expected to pick up in Q2, having been flat in Q1. Further signals that the economic recovery will gather significant momentum over Q2. However, loan demand in general had been weaker than the Bank had expected in their Q4 assessment/Q1 forecast released in January.

The pound struggled through last week, with any headway higher against the US dollar, due more to a weak dollar than GBP strength. It also struggled to make gains against the euro, despite a bad few weeks previously and stronger UK GDP figures. That was in part thanks to the stellar data from the US released over the course of last week, and part due to the continuing reduction in first dose vaccinations from the UK, allowing other countries/economies to close the gap. However, the pace of second doses provided remains impressive, with the UK seeing a steady increase in the numbers of vaccines given.

This week sees a blitz of data and survey releases due. Tuesday has the February/March labour market data, which should report some further reduction in employment and rise in unemployment in February, driven by the lockdown. Wednesday sees March consumer price inflation data released, and this is expected to record a rise in the headline inflation rate from 0.4% to 0.8% year on year, whilst the core rate is expected to rise to 1.1% from 0.9% year on year. Overnight on Friday, the April GfK (Growth from Knowledge) consumer confidence index is expected to record a further sizeable gain. Later, March retail sales figures should record another healthy rebound in sales, with headline volumes up a further 1.8% according to market consensus. However, it is April PMIs (Purchasing Managers’ Index) for manufacturing and services that could hold the key for the GBP. If these record further increases in activity from the March readings, then we may see upward revisions of UK growth numbers for 2021.

Overall, there is a lot of positive news already expected, how the pound will perform is dependent on whether the UK will beat what’s priced into consensus forecasts or not. If they do, this will intensify expectations of an earlier return to pre-pandemic output levels and clearly challenge the narrative that the recovery will take a long time to build momentum and monetary policy needs to remain looser for longer. That in turn could prove a GBP positive against other majors.

United States: US Fed feel the heat as the economy begins to motor

Last week saw data and most surveys point to ongoing strength in the US economy. Consumer price inflation rose to a headline 2.6% year on year in March, from 1.7% previously, whilst core inflation rose to 1.6% from 1.3%. The April Empire manufacturing survey reported a rise in the index to 26.3 from 17.4, the highest reading since October 2017. Retail sales values jumped 9.8% month on month in March, after a smaller drop in February, and the April Philly Fed Index rose to 50.2, its highest reading since April 1973! Jobless claims dropped to their lowest weekly reading since the pandemic began, whilst housing starts and building permits for March also outperformed consensus expectations.

The news wasn’t all good though, with the industrial production figures for March growing less than expected, and the University of Michigan consumer sentiment reading dropping back in April after recording a jump in March.

There were also comments from Federal Reserve Chairman Jerome Powell, which served to reinforce that the Federal Reserve were a long way from any tightening of monetary policy, or tapering of the asset purchase programme, and that despite an improvement in economic conditions according to the latest Fed assessment (Beige Book).

The US dollar struggled, making losses against the EUR and GBP, as risk appetite seemed to take another turn for the better. In absence of any significant US data due this week, and with the Federal Reserve’s April monetary policy decision looming (next week), it is unlikely that the USD will get much fundamental support, in my view.

Europe: Pace of vaccinations intensifies across Europe as COVID infections continue to increase; ECB (European Central Bank) meeting in focus

Europe has done a good job of stepping up the pace of vaccinations in most countries across Euroland and the wider European Union. The news that Germany is regularly vaccinating 0.7% of its population with a first dose on a daily basis, and that the French vaccination rate has increased to 450,000 doses daily, shows that Europe has addressed the issues of vaccine rollout and improved on any deficiencies.

That is encouraging, but the rates of infection have, in a number of countries, climbed. The peak in infections for France and Germany have not reached new highs, but they are not far away, have increased over the course of the past few weeks. Both countries have introduced additional restrictions on movement and social gatherings to try and tackle the issue, but as with other countries, the effects of these measures may take time to show up in the data. There is encouraging news though from the likes of Ireland, where the rates of transmission have fallen sharply, more than fourteen-fold from the peak of almost 1300 per million of population to under 80 in the latest data.

Some lifting of restrictions could be seen if the momentum on vaccinations and case numbers moves positively over the course of the next month or two, but with infection numbers at multiples of those seen in the UK, the lifting of restrictions will likely come later than in Britain.

This week’s major focus is on the European Central Bank Governing Council meeting. The Thursday decision on monetary policy is likely to be relatively straightforward, with no change to any of the monetary policy programmes. However, what should be of interest is the assessment of the economy. Has it improved, and will that put paid to any additional loosenings?

EUR/USD has risen above $1.20 in early trade this week, having visited those levels on several occasions last week. With only the provisional April manufacturing and services PMIs in focus from Euroland, there is limited fundamental data to support the EUR, but will the PMIs show enough positivity to keep the upward momentum going for the EUR?

Central banks: New Zealand and Turkey hold fire; Canada and Russia in the spotlight this week

The central bank meetings from last week saw the likes of the RBNZ (Reserve Bank of New Zealand) and Turkish central bank leaves interest rates on hold, as expected. The former was expected to leave all forms of monetary stimulus unchanged, but the RBNZ were a little more optimistic about the performance of both the domestic and global economy’s over the course of 2021. As for the Turkish central bank, the vast majority of forecasters expected it to leave policy unchanged, but it wasn’t unanimous, probably because the last central bank chief lost his job for raising rates to that level at the meeting prior. However, the central bank scrapped its pledge to keep policy tight until the end of the year, and that may weigh on the lira over the coming months, if rate cuts materialise without any meaningful improvement in the inflation outlook.

For this week, the focus is on the Bank of Canada and the Bank of Russia’s meetings on Wednesday and Friday respectively. The Bank of Canada aren’t expected to alter the monetary policy stance, which was left on hold at the last meeting as well. A slow vaccination rollout and rising COVID infections counterbalances against improving economic news, which suggests the recovery is already underway. As for the Russian Central Bank, the expectation is for a 25 basis point hike in interest rates. The move should not be viewed as a one-off, but as the beginning of a tightening schedule that could see regular incremental hikes in interest rates. With Russia embroiled in another dispute with the EU and America, could more sanctions destabilise the inflation and financial sector outlooks?   


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