FX outlook: Parky’s quick take – 22 March 2021

22 March 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: UK record vaccinations fail to support the GBP as EU dispute grows

Last week was relatively quiet on the data front, but there was the small matter of the Bank of England Monetary Policy Committee’s decision on Thursday to hold markets’ attention. The Bank of England Governor had suggested that the recent rise in yields seen globally was driven by an improvement in economic output expectations, and so shouldn’t be of great concern to the central bank. His colleagues on the Monetary Policy Committee agreed unanimously to keep interest rates on hold and leave the asset purchases programme unchanged as well.

That said, there were some at the Bank of England less convinced about the speed of the UK’s recovery thanks to the vaccination programme, and it is clear that any moves on interest rates, or reducing the size of the assets the Bank has under management are multiple quarters away.

Meanwhile, the situation regarding vaccinations in the UK had ups and downs. On the plus side, the UK had a run of record breaking days of vaccinations, as they stepped up the numbers of first and second doses. However, last week saw the NHS issue a notification that the number of vaccine doses would be in limited supply in April, so those offering vaccinations would have to prioritise the most vulnerable categories. There was also an escalation in the war of words between the EU and UK over the Oxford/AstraZeneca vaccine, with the EU indicating that they are considering banning exports of the AstraZeneca vaccine and its ingredients to the UK. The pharmaceutical and rival vaccine producer Pfizer warned the EU against such a measure, labelling it dangerous, given that Pfizer relies on lipid ingredients from the UK.

All in all, it was perhaps unsurprising that the markets were unsure which way to move, but risk appetite ended last week on the defensive, and that prompted the GBP to weaken against the USD as the week came to a close.

This week is a massive data week for the UK. First up is labour market figures on Tuesday (January/February), followed by consumer price inflation data for February on Wednesday, and that coincides with the release of preliminary March PMI (Purchasing Managers’ Index) data. On Friday, February retail sales data rounds out the week. The data and surveys could point to continued strength in the UK recovery, with the obvious exception of the labour market data, which is operating under furlough. That could support strength in the GBP against the EUR, but is perhaps less likely to prompt any sustained move higher in GBP/USD. Note that last week saw GBP/USD and GBP/EUR breaking back above $1.40 and €1.17 respectively. Though neither move was sustained, it shows that upside risks remain.


United States: Beyond stimulus what next for the US?

The moves over recent weeks from the US administration to stimulate the economy further have been well received amongst other authorities, particularly the Federal Reserve, who met last week. The Fed upgraded its forecast for growth, but continued to slam the door shut on speculation that they may be minded to make earlier moves on reducing the monetary stimulus in place. Moreover, the Fed Chair, Jerome Powell, stated that interest rates would not increase before the beginning of 2024, an effort to try and quell the rise in yields seen over recent months, albeit one that didn’t prove wholly effective. 

That the US is recovering is now beyond doubt, as a broad array of data and survey evidence has demonstrated in recent weeks. However, the question over when the US will return to normal remains valid, given that there are millions more unemployed or displaced than pre-pandemic, and the jump in spending seems in large part limited to government stimulus measures. With the next instalment of non-farm payrolls data due the week after this, there may be little attention paid to the limited data and surveys released this week. Some interest will be in the income and spending figures for February, to see how much spending receded after January’s bounce? There will also be interest in the University of Michigan consumer sentiment figures for final March, to see if the new stimulus is supporting a bounce in confidence?

The US dollar has performed solidly in recent sessions, but has failed to capitalise on weakness and dispute elsewhere in the developed economies of the West. Could it rally further this week, or will it fall back once again?


Europe: Just when you thought the Public Relations couldn’t get any worse

The European Union’s response to the vaccination problems that it is experiencing are becoming increasingly alarming, in my view. Some European governments have spent the best part of the last two months undermining public confidence in the efficacy of the AstraZeneca vaccine, and then went one better last week, by staging a suspension of its use, because of a perceived risk of blood clots. The European Medicines Agency was forced to once again state that the AZ vaccine was safe and effective, but that didn’t stop the French government stating that they would only administer it to over 55s. Let’s not forget that previously French President, Emmanuel Macron, had wrongly suggested the vaccine was quasi-ineffective in the over 65s.

Meanwhile, the European Commission President, Ursula von der Leyen, threatened that the European Union could ban the export of vaccines or their ingredients to countries that weren’t exporting enough of their vaccines to the EU in return. There is a meeting this week to discuss the EU’s next steps, but a number of EU leaders have already suggested they do not support such a retrograde step. In terms of AstraZeneca vaccine stockpiles, the EU now has over 8m doses unadministered, and the rate of vaccination is going down, rather than up. Rates of infection also seem to be climbing, another unhelpful addition to the EU’s list of problems regarding COVID.

This is all dominating over the focus on economic recovery also. Germany now looks to be heading for new tougher lockdown measures, having only recently relaxed the old ones. France and Italy are also experiencing far higher incidents of COVID infection, and on much lower rates of testing versus the UK. Consequently, the risks of a delay to the recovery in Euroland are growing, and so are the downside risks to the euro against other majors, in my view.

This week’s main data and survey releases may point to additional issues for the Euroland economy. Wednesday’s Euroland March PMIs could record underperformance in services, versus other major economies, and a slowing in manufacturing activity also. Friday’s release of the March German IFO (Information and Forschung / Germany’s Institute for Economic Research) business climate index could also show that the crisis on vaccinations is dragging on any recovery in current conditions and expectations. Overall, the data and surveys are of lesser importance to markets than the perception of mismanagement of the COVID crisis. That perception may be wrong, but it may prove difficult to alter the narrative.


Central banks: Turkey hikes by more than expected, but markets take fright as central bank head is sacked

Last week saw some interesting moves in terms of central bank action. There were a lot of central bank meetings away from the Federal Reserve and Bank of England announcements, and most were expected to leave interest rates unchanged.

So it was the case with the central banks of Indonesia, Norway, Taiwan and Japan, who all kept policy on hold, although the Norges Bank did indicate they were preparing themselves for an earlier hike.

However, there was more excitement from the central banks of Brazil, Turkey and Russia, all of whom hiked interest rates by more than expected. The Brazilian central bank hiked the Selic rate by 75 basis points (to 2.75%), when only a 50 basis point hike had been expected. The Turkish central bank hiked the one week repo by 2 percentage points, to 19%, when a move to 18% was anticipated, and the Russian central bank hikes by 25 basis points to 4.5% when the key rate had been expected to remain at 4.25%.

The decision by the central bank of Turkey was not received well by the Turkish President, Erdogan, who summarily dismissed the Governor, Naci Agbal late on Friday. That prompted the lira to plummet in value as investors took fright.

This week has a lot of meetings due, but no change in monetary policy is expected from any of them. Tuesday has the Hungarian central bank decision, Wednesday the central banks of Thailand and Czech Republic announce, Thursday sees the Philippines, Switzerland, Mexico and South Africa central banks reveal their decisions, and Friday has the Colombian central bank decision due. There may be some interest in updated forecasts from the South African Reserve Bank, but overall, no change is likely, at least in interest rates from any of the central banks scheduled to meet this week.


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