What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: GBP breaks to new highs versus USD and EUR
Last week was noticeable for several reasons. Firstly the pound broke above $1.40 for the first time since April 2018. Secondly, the pound also broke above €1.15 for the first time since May 2020. There was also a sharp increase in gilt yields, across the curve, as the Bank of England Monetary Policy Committee continued to reduce expectations regarding negative interest rates. Thirdly, the UK data and surveys were generally better than expected. UK consumer price inflation rose unexpected on a headline basis in January, the February Growth from Knowledge (GfK) consumer confidence reading rose to its highest level since March 2020 and the manufacturing and services PMI (Purchasing Managers’ Index) indices for February rose, the former unexpectedly, and the latter by far more than consensus forecasts.
The GBP’s rally was also probably helped by ongoing positive news regarding the UK’s vaccination programme, which has now vaccinated more than a quarter of the entire population and more than 30% of the adult population, with one dose of the vaccines. Boris Johnson’s plan to unlock the UK economy, which he outlined on Monday, may also give a lift by studies suggesting that the vaccine not only provides protection from the virus, but also helps to prevent its transmission.
For this week, the questions over the UK’s economy will centre around the labour market data, released on Tuesday. That’s the only major fundamental release for markets to hang their hat on. Employment is likely to have fallen further in December, and the unemployment rate is likely to have edged up. There could be a ‘long-COVID’ recovery period for the UK labour markets, as well as a reasonable percentage of those who have had the virus.
The Chancellor will be finalising his plans for the upcoming Budget, released on the 3rd March. Has the economic data given him any significant clues as to what else he needs to do to support the economy in recovery? As for the GBP, has it been the beneficiary of peak optimism around the UK vaccination programme and peak pessimism regarding the US and Euroland’s difficulties?
United States: US data questions the need for fiscal relief
Last week, the White House administration continued to push for a fast track for his $1.9 trillion fiscal relief plan, despite there being reservations around some of the non-fiscal measures contained in the package. In particular, the phased increase in the US minimum wage, from $7.25 per hour to $15 per hour, has concerned some moderate Democrats. However, the improved news on the US economy added to the problems regarding the fiscal relief package with some in government asking whether it was even required?
In particular, last week saw an improvement in the retail sales and industrial production figures for January, with sales values jumping by almost 5 times the expected increase, whilst industrial output was up 0.9% month-on-month, more than double consensus forecasts. Added into that, the Empire manufacturing and Philadelphia Fed business outlook surveys for February both beat market expectations, housing data and surveys were stronger than forecast, and the preliminary February PMIs reported overall economic activity slightly stronger than in January.
This week’s array of releases aren’t particularly significant, with February Conference Board consumer confidence and final February University of Michigan consumer sentiment readings top and tailing a week with more home sales and jobless data. The revised Q4 GDP release isn’t expected to offer much greater insight, and is probably now too backward looking to make a difference to market sentiment. June personal income data will have been boosted by household stimulus cheques, and that should also lift spending sharply higher, but again, little in the bag of data and surveys to offer the USD any prolonged support.
Europe: Still lagging behind
In Euroland, last week was relatively quiet as far as data and surveys were concerned. Those that were released, such as the February ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey from Germany and preliminary February Euroland PMIs for manufacturing and services reported some improvement in expectations for future activity, stronger manufacturing activity, but disappointment about current growth in services.
In other areas, there were new car registrations that were much weaker than previously, though due to the lockdown, whilst construction activity towards the end of the year was also weaker than expected across Euroland. Meanwhile, Europe’s vaccination programme shows little sign of stepping up, with the low take up/rejection of the AstraZeneca vaccine of particular concern in some countries. Supply problems elsewhere in vaccines means that the best countries in Europe are still a long way behind the UK, in terms of numbers vaccinated. All this could mean a slower re-opening of the Euroland economy versus the UK and other major economies.
Already this week, the February German IFO (Information and Forschung / Germany’s Institute for Economic Research) index has been released. This pointed to an improvement in the conditions experienced by manufacturers, confirming what had already been signalled by the PMIs. For the remainder of the week, there are few important releases due. The final January consumer price inflation figures for Euroland should confirm a sharp jump in inflation pressures, but an ongoing undershoot of inflation versus target. Economic sentiment readings at the end of the week should record some pick up in confidence in February over January. That said, the improvement is likely to be limited. None of the releases will offer the EUR any additional support, and the markets will look instead to the political announcements at home and overseas for any additional impetus.
Central banks: Indonesia cuts, Turkey holds; rates on hold this week
As expected the Indonesian central bank cut interest rates by 25 basis points last week to 3.5% as expected, the lowest level since the rate was introduced back in 2016. The Governor, Warjiyo, stated that the move was consistent with Bank of Indonesia’s targets to keep the rupiah stable, and was supported by low inflation and moves to boost growth. The growth outlook was downgraded, but room for additional interest rate cuts are seen as limited, with the Governor and central bank looking at alternative stimulus measures instead.
Meanwhile, the CBRT (Central Bank of Turkey) held their interest rates at 17%, again as expected, last week. However, the news wasn’t all positive, with the inflation rise seen to undermine the positive moves from the currency, such that the CBRT needed to maintain tight monetary policy for the foreseeable future.
This week sees a number of central bank meetings due. We’ve already had the Bank of Israel leave monetary policy unchanged, but the good news is that the Israeli economy is rapidly re-opening thanks to the advanced deployment of vaccinations. Also this week we have the central banks of Hungary, New Zealand and South Korea, deciding on monetary policy, but none are expected to surprise expectations that rates will be left on hold. Questions remain about when policy might start to normalise, but that seems to be some way in distance.
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