FX outlook: Parky’s quick take – 20 September 2021

20 September 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: GBP/USD below 1.37, Bank of England eyed

Sterling extended last week’s loss at the start of the week amid dollar gains and soft market sentiment. Last week’s employment data were robust again and inflation rose much more strongly than expected. At the same time, the economy appears to be facing a number of headwinds. Monthly GDP (Gross Domestic Product) and PMI (Purchasing Managers’ Index) data point to a loss of momentum, fiscal policy has been tightened unexpectedly early and aggressively, and there have been further signs of supply constraints. There is also uncertainty over ending the Furlough scheme at the end of month. Last Friday’s disappointing retail sales data further added to the uncertainty for this week’s Bank of England (BoE) meeting.

The September BoE meeting has become more interesting over the past few weeks despite it being only an interim meeting with no accompanying Monetary Policy Report (MPR). This is due to the recent revelation during the Monetary Policy Committee’s testimony to the Treasury Select Committee that members were equally split over whether the “necessary”, although not sufficient conditions, had been met to tighten policy. The main interest should centre on whether there is further evidence of a shift to earlier policy tightening in the MPC’s guidance, which could impact Sterling, in my view.

UNITED STATES: USD on front foot amid soft sentiment, FOMC in focus

The USD started the week on the front foot as the woes of China’s largest real estate firm weighed on the wider market sentiment and increased the dollar’s safe-haven demand. The strong retail sales data last week suggest that the consumer sector is still going strong and should help reduce some of the growth fears of late. Additionally, the data again raises the question of whether the latest weak jobs number was more of an aberration rather than the beginning of a trend. All of this makes the next employment report on 8 October even more important to gauge a better idea of the economic recovery and the Fed’s timeline for reducing asset purchases.

This week’s highlight is the Federal Open Market Committee (FOMC) meeting on Wednesday. Event risk had looked to have fallen back after a weak employment report and decline in consumer confidence. However, last week’s strong August retail sales report seemed to lift it again. Updated policy guidance on the Fed’s timeline of cutting asset purchases and policy outlook on future rate hikes will be the areas to watch. Communications around inflation might also be important, but last week’s slight miss in inflation data might suggest that the FOMC Fed officials could keep the same language as in their July statement, that described the strength in inflation as "largely transitory".

EUROPE: EUR holds, Purchasing Managers’ Index eyed

The EUR held up well at the start of the week, with EUR trading slightly lower against the USD but gained against Sterling on Monday morning. European data have held up well, and Covid trends have been heading in the right direction. The German elections do not appear to pose a risk to EUR sentiment given the distributed balance of probabilities and reactions to different outcomes. There also appears less obvious signs of labour market distortions from Covid than in the UK or US.

The region’s Purchasing Managers’ Indices (PMI) this week will likely give a further insight into the region’s economic recovery and the impact of the Delta variant. An upbeat result could play positive for the EUR, in my view.

CENTRAL BANKS: A number of policy meetings this week

Central bank policy meetings are set to dominate this week. Guidance will be the main focus, but Norges Bank looks on course to be the first major central bank to raise interest rates in the new cycle. Pressure is building on a number of other central banks. It means that the BoE policy meeting is “necessary” watching (as discussed above). The Fed’s outlook on future rate hikes should be important (discussed above). The Riksbank, however, might stay on hold, though a more optimistic tone could be adopted. Bank of Japan (BoJ) and Swiss National Bank (SNB) might not generate big fireworks this week. In emerging markets, Brazil Central Bank (BCB) will likely maintain the pace of hikes at 100bp, despite the worsening of inflation risks over the past few weeks, and National Bank of Hungary (NBH) will also likely hike rates as the NBH continues to deliver tightening before it reviews progress of its cycle in the September forecast updates. The central banks of Indonesia (BI), Philippines (BST), South Africa (SARB) are in the camp of no changes in monetary policy settings and continued accommodative stance to support the economic recovery.

View last week’s Quick take.

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