What’s happening with currencies this week? Neil Parker, Markets Strategist shares his views.
Will Us Payroll Data Or The Bank Of England Meeting Prompt Renewed FX Volatility?
UK: Bank of England meet as focus remains on Covid numbers
The daily coronavirus infection figures from the UK showed significant signs of a drop in the level of daily infections, although the levels of hospitalisations and deaths, which have been rising, remain elevated. The government’s decision to remove domestic restrictions from 19 July is yet to fully be reflected in the figures, but the reduction in infections is encouraging at this point. The next week or so should offer a better picture with regard to the infection level in the UK, and whether the re-opening of the economy has had a material effect on the Covid numbers.
Last week’s data and surveys were relatively light from the UK. The Confederation of British Industry (CBI) distributive trades survey for July reported ongoing strength in sales volumes, whilst the consumer borrowing figures for June reported a modest rise in unsecured lending, but a record high in terms of lending secured on dwellings. That contrasted with weakness in the Nationwide house prices data for July, which recorded a small and unexpected drop in house prices.
For this week the focus is on the Bank of England (BoE) Monetary Policy Committee meeting and quarterly Monetary Policy Report. The outlook for monetary policy remains wedded to what happens in the economy, and in particular how lasting the recent increase in inflation is. The current thinking is that the rise in inflation is temporary, but the recent increase in average earnings growth, prompted by labour shortages across a number of sectors, may take longer to rectify and therefore might be of greater concern to the BoE. No change is expected at this meeting, but the markets will be interested in how the inflation and growth projections have been altered.
In terms of the GBP, it has still struggled to make any sustained headway higher against the USD or EUR, although against the EUR has made fresh multi-month highs recently. The ongoing struggles to sustain a break above $1.40 and to push above €1.18 may provide ongoing difficulties for the GBP, particularly with some important releases due this week from the US.
United States: Fed in no hurry to taper; payrolls to leap again?
The US Federal Reserve is in no hurry to alter the path of monetary policy. Last week’s Fed meeting proved that the outlook for the US economy is not sufficiently different from expectations to divert the thinking of the majority of Fed members, in particular the Chair, Jerome Powell. Notably also, the US data and surveys disappointed somewhat against market expectations, particularly the provisional Q2 GDP (Gross Domestic Product) growth figure, which rose by an annualised 6.5% q/q, undershooting the consensus forecast of 8.4%. Overall, the figures from the US continue to report robust economic expansion, but the Fed are increasingly concerned by the rise of the delta variant of coronavirus, which is currently spreading throughout a number of US states, including Florida. That could have a negative effect on jobs growth and the return to normality for businesses across America.
Meanwhile, this week sees the focus all on the July employment report on Friday, and in particular what the net number of new non-farm payroll jobs will be. The consensus forecast is for July payrolls growth to outstrip that of June, which was an impressive 850k. If the payrolls figure does beat this, then that could improve risk appetite and undermine the recent strength in the USD. Moreover, we could see a reversal in the recent drop in US yields and a rise in equity valuations.
A plethora of secondary data and surveys precede the release of the July labour market data, and these shouldn’t offer much additional new information about the strength of the US recovery. Also worth looking out for whether the rise in average earnings persists in the US. The consensus is for earnings growth to rise to within a whisker of 4% year-on-year, which could be indicative of labour shortages emerging in the US.
Europe: Recovery momentum showing signs of slowing as prices pick up
The figures from Euroland last week were somewhat surprising, particularly some of the survey data. Germany’s Institute for Economic Research (Information and Forschung, IFO) business climate survey for July was expected to report a small slowing in the pace of activity, but the survey miss was much larger than expected, dropping far more sharply and the current assessment index rising more slowly than anticipated. Other than that, the inflation figures from Germany and Spain for July reported a larger than expected rise in headline inflation rates. There was some good news, with the German unemployment figures reporting a bigger than expected drop in the rate of unemployment, whilst Belgian and French Q2 GDP (Gross Domestic Product) figures showed marginally faster rates of expansion.
For this week, we’ve already had the release of final July manufacturing PMIs (Purchasing Managers’ Index) for Euroland. These confirmed that manufacturing activity had slowed in July from June, but not by as much as initially estimated. For the rest of the week, there are no important releases due. The final July services PMI figures on Wednesday should not show activity much different from the provisional estimate, which reported faster activity than in June.
The EUR remains under pressure against the likes of the USD and GBP. Even with some of the strength seen in the data and surveys, and the rise in inflation pressures, market expectations are that the European Central Bank will be the last of the major central banks to taper asset purchases and raise interest rates. As such, the outlook for the EUR is unlikely to improve. It may well take a material deviation in the data or surveys from the UK or US to prompt a sizeable rebound in the EUR’s valuation.
Central banks: Brazil and Czech Republic to hike again after Hungary hike
Last week, the Central Bank of Hungary surprised the markets with a larger than expected hike in the overnight deposit rate. The central bank of Kazakhstan also hiked their 1 day repo rate from 9% to 9.25%, which we had not expected, but the market consensus was pricing in. These moves are the latest decisions from emerging market central banks to tighten policy in the face of a global economic recovery and stronger inflation pressures.
This week, there are a lot of central bank meetings due. Overnight on Tuesday, the Reserve Bank of Australia (RBA) will announce. It is expected to keep interest rates unchanged, but the markets will be watching for any additional guidance on the planned tapering of the RBA’s bond buying programme. With renewed lockdowns in situ in some states, the RBA is likely to remain cautious. Next up is the Bank of Thailand (BoT) on Wednesday, which though concerned by levels of headline inflation is more worried about downside growth risks. No change expected from the BoT. The Brazilian Central Bank (BCB) on the other hand is expected to hike interest rates by a further 1 percentage point to 5.25%. Inflation has surged, and along with it so have inflation expectations. The BCB is expected to demonstrate a tough stance to inflation, in order to keep the Brazilian real under control. On Thursday, the Czech Republic’s central bank is expected to hike their official interest rate to 0.5% from 0.25% after upside surprises in inflation. Finally, on Friday, the Reserve Bank of India and central bank of Romania are both expected to leave interest rates on hold.
There remains the potential for a lot of surprises from these meetings as some of the emergency measures to stabilise activity could be withdrawn more quickly, and some central banks are likely to be more jumpy over the prospect of resurgent inflation.