FX outlook: Parky’s quick take – 21 June 2021

21 June 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 slides despite increasing inflation risk; BoE (Bank of England) set to meet

The news of a delay to the unlocking of the UK economy was followed last week by a further pick up in daily COVID infections reported. The daily figures have climbed from averaging over 7000 new cases per day to over 9000 per day. The UK government’s decision to accelerate vaccinations saw the remaining adult population invited to book their first jabs in England, although that was already being done in Wales. 

The last week saw a lot of important data released. First up was the UK labour market data for April and May. The figures from the ILO (International Labour Organisation) saw employment rise less than consensus forecasts, but average earnings growth was up more than expected in April and the claimant count fell far more sharply than anticipated in May. Following that, May consumer price inflation figures recorded headline and core CPI (Consumer Price Index) inflation rates above expectations, with the headline rate rising to its highest level since 2019, whilst core inflation rose to its highest level since August 2018. Finally, the UK retail sales figures for May reported a decline  in sales volumes, possibly as the re-opening of indoor services spending led to a dilution of retail goods spending.

The pound slid last week, having started the week in a more buoyant mood. A combination of the factors discussed above, and some change in the Fed’s monetary policy outlook (discussed in the next section) were responsible. GBP/USD fell sharply, to below $1.3800, but performed better against the EUR, after comments from ECB (European Central Bank) Chief Economist, Philip Lane (see Europe section).

For this week, there will be some interest in the provisional June manufacturing and services PMIs (Purchasing Managers’ Index), released on Wednesday, to see whether the services sector has continued its recovery or been damaged by the UK’s decision to delay unlocking. The greatest attention though will be on the June Bank of England MPC (Monetary Policy Committee) meeting and announcement on Thursday. Though no change in policy is expected, the probability is that the MPC will be marginally more concerned with the inflation and will make note of those concerns in the minutes. After the Fed last week, the Bank of England’s reaction to current economic conditions will be closely watched.

United States: Fed hints at greater number of hikes in 2023 as fears over inflation grow

After some worrying inflation figures previously, last week’s Federal Reserve meeting was expected to deliver some caution to the markets regarding how long it would be prepared to tolerate this. As it turned out, the Fed did much more than this, with some Fed members revising their forecast path for US interest rates to incorporate an additional hike in 2023 in the June dot plots. This indicates an earlier start to the hiking cycle, and by inference an earlier end to the asset purchase programme than previously anticipated.

There is still some doubt regarding the timing of any taper from the Federal Reserve, especially given the concerns over the labour market and whether further improvements will prove much slower in speed. That would seem to be the case in terms of the jobless claims data, which in the latest weekly numbers reported a rise in initial claims and continuing claims last week.

The US dollar rebounded on the Federal Reserve news, rallying to multi month highs on a trade weighted basis, and taking a big chunk out of recent EUR and GBP gains against it. Can it sustain these gains though? The pace of improvement seen in the US dollar would suggest not, and next week’s data and surveys are unlikely to offer the USD any reason to sustain the rallies either.

Particular releases to look out for are the May existing and new home sales releases, intersected by the provisional June manufacturing and services PMI indices. May personal income and spending figures at the end of the week are likely to be of greater interest than the final Q1 GDP (Gross Domestic Product) estimate on Thursday.

Europe: ECB (European Central Bank) may be slower on reducing the pace of asset purchases

It was a very quiet week on the data front from Euroland, but there were still some fireworks from the fundamental front. ECB Chief Economist, Philip Lane, cast doubt on the prospects of reversing the Q1 asset purchase acceleration in September, suggesting they might not have enough evidence to do so by then. That suggests that even if, as expected, the economic data and inflation continue to pick up, the ECB might hold off until their late October meeting to hike.

The EUR slipped on the back of this news, as expectations of a hike in Euroland interest rates were setback, just as the expectations of US hikes were brought forward. EUR/USD briefly dropped back beneath $1.1850, although managed to rally back above there before the end of the week.

This week sees the provisional June manufacturing and services PMI indices released on Wednesday and the June IFO (Information and Forschung / Germany’s Institute for Economic Research) business climate survey from Germany released on Thursday. Those are likely to be the most interesting releases for the markets. Will services activity have picked up further, and if so, will it close the gap on services activity in the UK and US? Will the IFO survey point to weaknesses in expectations to contrast with strength in the current assessment?

There are plenty of ECB speakers due this week, including President Lagarde and Chief Economist Lane. Will they continue to downplay concerns over inflation? If they do, is the euro likely to continue to underperform, even if the US dollar gives back a bit of last week’s gains?

Central banks: rate hikes now and to come, possibly sooner than expected

Last week saw the BCB (Brazilian Central Bank) raise the Selic rate from 3.5% to 4.25% as expected, and made it clear that they see a similar sized hike to come in August, when the BCB next meet. However, the BCB did leave the door open for an even faster pace of reversing the monetary stimulus, based on what inflation expectations do. The central bank sees policy normalisation as now appropriate, such that rates are likely to reach up to 7% before the end of the year.

Policy was left on hold by the Bank of Indonesia, Swiss National Bank, Norges Bank, Turkish Central Bank and Bank of Japan. That wasn’t the whole story though, as the Norges Bank hinted that the first hike is likely to come in September, with one hike per quarter thereafter until the deposit rate reaches 1.25%. The Central Bank of Turkey also hinted at easing to come, but only provided the currency remains under control and inflation continues to settle down.

For this week, aside from the Bank of England’s meeting on Thursday, there are a few meetings in Europe that could be of interest. Hungary’s central bank meet on Tuesday and are expected to hike rates from 0.6% to 0.9%. The Bank of Thailand are next up, meeting on Wednesday, but not expected to change rates, and swiftly followed the same day by the Czech Central Bank, who are also expected to hike interest rates, this time from 0.25% to 0.5%. On Thursday, Banxico meet just after the Bank of England. They aren’t expected to alter the monetary stance, but with inflation risks rising, there could be some comment in the statement to suggest they are willing to act if inflation pressures continue to build.

To read the previous quick take, click here

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