What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: UK data points to impressive recovery
After a relatively quiet period in recent weeks on the data and survey front, last week saw a glut of data and surveys released. First up was the labour market data for March and April, which recorded a larger than predicted rise in employment of 84,000, and an unexpected drop in unemployment from 4.9% to 4.8%. Opinions on the labour market seem to be shifting, such that expectations are for a much smaller rise in unemployment levels and rates once the furlough payments cease. It is still too early to tell whether that is correct or not, but the revisions to such macroeconomic forecasts build in further optimism for the UK recovery.
After that release, Wednesday’s inflation data (consumer, retail and producer) for April also recorded a rise in inflation pressures, though it was retail and producer price inflation that surprised to the topside, whilst consumer price inflation only matched consensus predictions. Even so, the concerns over whether this is a temporary or more lasting change to the pricing environment is one for the Bank of England to ponder.
Finally, on Friday we had a slew of releases one after another. Overnight, the GfK (Growth from Knowledge) consumer confidence index for May rose to -9, its highest reading since March 2020. That was followed by April retail sales figures, with volumes up more than twice market consensus and the headline volumes index now 10% higher than it was pre pandemic. Finally, the provisional May PMIs (Purchasing Managers’ Index) for manufacturing and services surprised. The manufacturing index rose to its highest level since the series began, whilst services activity bounced again, but by less than consensus forecasts. The underlying message from last week’s releases was that the UK is at least keeping track with the optimism surrounding its recovery post pandemic.
This week is relatively quiet. In terms of data and survey prints, there are only the April public finances and May CBI (Confederation of British Industry) distributive trades survey releases to focus on. Neither of these releases should create much excitement in FX markets, however. As for the pound, having tried and failed to break to new 3-year highs against the US dollar, there still appears to be reluctance to support additional momentum from hereon. Even in the face of US concerns and a generally improved risk environment, the GBP may struggle to put on much additional gain from here.
United States: US shows some signs of stress
Over the course of the last week, what have the data and survey releases told us. Firstly, activity indices like the May Empire manufacturing survey and the Philly Fed business outlook index dropped back versus April readings, suggesting a modest pull back in activity rates. Housing data from the May NAHB (National Association of Home Builders) housing market index and April housing starts, building permits and existing home sales also point to slower growth than in recent months. The news though isn’t all negative, with Friday’s release of manufacturing and services PMIs recording all-time highs for activity in both, and prior to that, weekly jobless claims falling to a new post pandemic low.
The questions that arise are whether the US economy will match the optimism displayed in the surveys, and if this is already baked into market sentiment. I suspect that the economy might fall short of what the PMI surveys seem to be suggesting, whilst the markets are already highly optimistic, as evidenced by asset prices, particularly equity values.
The minutes of the 28th April FOMC (Federal Open Market Committee) meeting and monetary policy decision indicated that some members of the Federal Reserve Board felt that it would soon be time to discuss tapering asset purchases. However, since that meeting there has been some reduction in confidence levels regarding the US’s economic rebound, and some Fed members have tried to downplay any prospect of a near term revision to the monetary strategy in the past week.
For this week, April new home sales figures and the May Conference Board consumer confidence index on Tuesday, will be of interest to see if trends exhibited in other data and surveys are repeated. Revised Q1 GDP (Gross Domestic Product) figures on Thursday are not expected to record any changes to the rate of Q1 growth, which was already at odds with the drops in output seen in Europe. Finally, on Friday, April personal income and spending figures might underperform expectations after the March stimulus related boost, and there will be plenty of interest in the University of Michigan consumer sentiment data (final May). Will that rebound after the unexpectedly large drop seen in the provisional May survey? Will there be further efforts from Fed members to reduce market expectations of any impending change to the monetary stance?
The US dollar can expect no favours from these releases, but is much of the negativity now priced in? Against the GBP is general risk positive sentiment sufficient to prompt the GBP to new 3-year highs, and what will the currency pair do if it gets there?
Europe: Euroland shows vaccine bounce in PMIs
The Euroland economic calendar was fairly limited last week, but Friday was worth waiting for. The provisional May PMI figures recorded strength in the economy as the rates of COVID infection fell and talk intensified about staged re-opening of the economies. However, though the services PMI rebounded in May, the rate of activity expansion remains well short of what is being seen in the UK, which began its unlocking programme earlier. So the questions may be how quickly can Europe catch up, or how far behind are they in terms of the rebound?
For the EUR, it was another solid week. The EUR gained against the USD, although that was likely due more to the weakness of the US dollar in the face of volatility and some eventual risk appetite recovery, as well as data and survey releases that cast doubt on the speed of the recovery in the globe’s largest economy. Could the European economy begin to catch the US in the months to come and what might that mean for FX market sentiment? Given the problems that the Euro area has suffered with COVID and with vaccines rollouts, is the EUR benefiting now that vaccine programmes are able to more than match those in the US? Could that offer additional support to the EUR in the weeks to come?
As far as this week is concerned, the German IFO (Information and Forschung / Germany’s Institute for Economic Research) survey for May, Euro area consumer and economic confidence, also for May and revisions to Q1 GDP figures are the key releases. There has been a worsening in relative performance of surveys in the Euro Area, so these figures offer an opportunity for the gap to close. It is likely that will occur, which again could lend itself at least to some outperformance of the EUR against other currencies, such as the USD and GBP.
Central banks: Another rate rise last week; nothing expected this week
Last week saw the Icelandic central bank raise interest rates from 0.75% to 1%. The move was prompted by concerns over rising inflation pressures and is out of sync with the rest of Europe, where monetary policy is predominantly still being loosened. It would appear that this won’t be an isolated hike from Iceland’s monetary authority, with the risks skewed towards another by early Q4, in my view. The South African Reserve Bank left interest rates on hold at their meeting last week, as expected. The implied policy rate path for the SARB (South African Reserve Bank) is for a gradual tightening in interest rates over the remainder of the year, but whether that happens or not will be dependent on the progress of the economic recovery from the COVID outbreak.
This week sees a number of central bank meetings due. First, we have the Bank of Indonesia on Tuesday. A rate change is not expected, despite signs of increased COVID infections across Asia. Also on Tuesday we have the central bank of Hungary’s monetary policy decision. This is also expected to leave interest rates and the stance unchanged, but there have been strong hints of a tightening in June, mainly because of higher inflation. On Wednesday morning we get the Reserve Bank of New Zealand’s decision on policy. Again rates are expected to be left unchanged, but the RBNZ (Reserve Bank of New Zealand) are likely to recognise that the improvement in the economy is above what was expected. Finally, in South Korea, the central bank is also expected to hold rates, but is likely to raise its inflation outlook and at the same time downgrade short term economic expectations.
Overall, the tide is slowly turning on monetary policy but geographically some economies in the Western world find themselves further forward than those in parts of Asia, and yet the fear of inflation is greater in Asia than in the West.
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