What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: GBP struggles despite glut of strong data outturns
The UK’s glut of data releases did not disappoint last week. On Tuesday, the labour market data for February and March reported a drop in the unemployment rate, and a smaller drop in employment versus expectations, a further indication that the Q1 GDP (Gross Domestic Product) reduction would also be smaller than feared. On Wednesday the UK inflation figures reported an uptick in headline and core consumer price inflation figures for March, but the headline increase was still less than expected and the core rate remains at barely half of the target level. Friday was where a lot of attention was centred. Retail sales volumes leapt in March, by over 5% month on month on a headline basis, with clothing and footwear volumes, non-specialised store sales and other store sales leading the way. Notably, the volumes for online volumes rose by less than a third of overall sales, and as a percentage of total sales dropped to 32.8% in March, from the peak of 36.4% in January.
The other big release on Friday was UK PMIs (Purchasing Managers’ Indices), with both the manufacturing and services readings exceeding 60, indicating that the UK recovery continues to accelerate in April, though that is hardly surprising given that the UK took another step on the unlocking path in April, with the opening of non-essential retail and outdoor hospitality. The news wasn’t all good, with the March fiscal deficit figures reporting a post war record for the deficit as a percentage of GDP, and the GfK (Growth from Knowledge) consumer confidence survey for April recording a more modest improvement versus expectations.
UK vaccinations continued to climb, with over 95% of the over-50s having now had at least a first dose of vaccine, and more than 12.6m having had both doses of vaccine. There was also recognition that COVID infections in the UK are sufficiently low to classify that the country is no longer in the midst of a pandemic.
For this week, there are few releases of importance from the UK. Indeed, this week is a period of calm, before the likely storm that may come in the week commencing 3rd May, when the Bank of England is due to present its latest decision on monetary policy, minutes and quarterly GDP and inflation assessments.
Sterling’s difficulties were never far away last week, despite the stronger data and survey releases. The latest area of concern is the rapidly approaching Scottish elections for Holyrood. The polling data indicates that the SNP (Scottish National Party) are likely to achieve an overall majority, or at least win enough seats with the Independence leaning Greens to lobby strongly for another referendum on Scottish separation from the UK. The pound was badly affected the last time an Independence referendum was held, falling from above $1.70 to $1.50 in the aftermath of the vote, and that despite the Scottish people voting to remain. Could the pound be back under pressure from another protracted referendum campaign?
United States: US waits on Federal Reserve meeting as risk appetite returns
Unlike the UK, and similar to Euroland, the US release calendar was relatively slim pickings last week. The US jobless claims data for the week ending 17-April reported a drop in claims to 547k, from the previous week’s 586k recorded. The home sales data was conflicting, with March existing home sales drop to a shade over 6 million on an annualised basis from 6.2 million in February, but new home sales rising to over 1 million, from 846k. Finally, the PMIs for manufacturing and services activity pointed to the US recovery remaining extremely robust, the composite index rising to 62.2, its highest reading since records began in 2009.
For this week there is the April FOMC (Federal Open Market Committee) meeting on Wednesday to focus market attention, and though Fed officials, including the Chairman, Jerome Powell, have repeatedly suggested there is no need to consider reversing course on monetary policy loosening, the pace of recovery, and headline inflation increases may provoke a modest change in the Fed’s thinking on future policy, particularly after the upgrade to the growth assessment in the Beige Book. The next set of dot plots aren’t due until June, but we could see individual expectations for the Fed funds altered upwards when they are released.
On the data front, there is the Q1 GDP data release on Thursday, which should report robust growth in Q1, after a decent end to 2020. The momentum in the US economy could mean that the US economy recoups its lost output within the next quarter or two, well ahead of the likes of Euroland and the UK. Will that, and a probable increase in consumer confidence in April help the US dollar? Perhaps not, given that the dollar is reacting negatively to the improvement in risk appetite. Ahead of next week’s non-farm payrolls release for April, there may be interest in Thursday jobless claims data, with the last two weeks having indicating a significant reduction in claims. Will that have been sustained, suggesting a bumper payrolls figure?
Europe: Euroland PMIs record modest services expansion as ECB (European Central Bank) stay oh so quiet on policy
Euroland vaccine programmes continued to close the gap on the UK and US, as the likes of Germany, France and other major Euroland nations vaccinated almost significantly more of its population over the last week than the US and in particular the UK. Whilst that, and tighter restrictions, have led to a stabilisation in cases, Euroland countries are yet to see a sizeable reduction in case numbers were renewed outbreaks have been located.
Meanwhile, on the data and survey front, there wasn’t much of note released this week, at least until Friday. The manufacturing and services PMIs from Euroland recorded a further increase in activity, with the manufacturing index reaching 63.3, the highest reading since the series began, and the services PMI crawling back above 50 in the provisional April readings. The performance of services is still of concern to policymakers, as activity in services prompts a larger reaction in the overall economy, because of its relative size.
The European Central Bank meeting last Thursday turned out to be a relatively quiet affair. The ECB indicated that short term downside economic risks remained and that they were in no hurry to review the asset purchase programme, which would expand in terms of amounts over the next few months. Despite increasing evidence of a bounce back in activity, the ECB remained concerned by COVID and the risk that a renewed outbreak could derail the Euroland economic recovery in the short term. That seems a sensible approach.
The euro held up reasonably well over the course of the week. Against the US dollar, it broke above $1.20 in the early part of last week and tested towards $1.21 by the end of it, despite briefly dipping back beneath $1.20 in the latter half of the week. Against the UK pound, the euro made more sustained progress over the second half of last week, EUR/GBP rising above £0.87 at the end of the week.
This week ahead has already seen the German April IFO (Information and Forschung / Germany’s Institute for Economic Research) survey released, which reported only a modest improvement in the business climate index, with the expectations element dropping back. That could have been because of ongoing issues around coronavirus, with infections still rising despite tighter restrictions. The rest of week has a lot of interest data released, including German April unemployment figures on Thursday, along with Euroland M3 money supply figures for April and in the early afternoon provisional April German consumer price inflation data. However, the largest interest is likely to be in the Euro Q1 GDP figures, released on Friday. How large will the contraction in output have been in Q1, after the 0.7% quarter on quarter contraction in output in Q4? Can the euro hold onto its newfound gains given the reluctance of the ECB to sound the all clear and the prospect of some weak data?
Central banks: Russia and Canada latest to lead the charge towards monetary policy normalisation
Last week was more interesting than it was expected to be in terms of central bank meetings. The Bank of Canada’s monetary policy meeting on Wednesday was the first surprise, as they agreed to reduce the weekly net purchases of bonds to C$3 billion, and also moved up its guidance on the first rate increase to sometime in the second half of 2022. At the March meeting they had suggested rates would not rise until 2023 at the earliest. As for the Bank of Russia, they raised interest rates to 5% from 4.5%, exceeding consensus forecasts that had expected an increase to 4.75%. The reasons behind this were a build-up of inflation risks, and an improvement in demand, both domestically and globally. There were hints that more rate increases could come in the next few meetings, with another as soon as the June decision.
This week, there are numerous meetings due. On Tuesday the Riksbank, central bank of Hungary and Bank of Japan all meet, but none are expected to amend the monetary policy stance or outlook against backdrops of economic uncertainty as COVID infections have prompted ongoing restrictions in Sweden and Hungary, whilst in Japan there is little inflation to speak of, but a modestly more positive economic outlook. Finally, on Friday, there is the Colombian central bank meeting. Inflation is well below target and economic activity remains soft, but other emerging market central banks are tightening policy, so is there a risk the Colombian central bank signals a tightening to come?
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