FX outlook: Parky’s quick take – 26 July 2021

27 July 2021

Neil ParkerFX Markets Strategist

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What’s happening with currencies this week? Neil Parker, Markets Strategist shares his views.

United Kingdom: Sterling holds despite moderating Purchasing Managers’ Index (PMI) data

GBP/USD fell below 1.36 during last week amid sour market sentiment before rising back above 1.3750 later in the week. UK Covid cases had been rising quickly. However, it is worth noting that NHS data show fatalities with Covid as the main cause of death (death certificates) is still thankfully very low. The Bank of England’s (BoE) Deputy Governor Broadbent seemed to be in the “wait and see” camp according to a speech released last week, unlike Monetary Policy Committee (MPC) members Saunders and Ramsden, who recently indicated a shift towards the possibility of tightening monetary policy. July PMI data released last Friday moderated, with manufacturing PMI falling to a four-month low of 60.4 (Bloomberg survey consensus 62.4; prior 63.9) and Services PMI falling to 57.8 (consensus 62; prior 62.4). The PMI data fit into a broader picture of increasing pressures on the economy and waning confidence, suggesting that the rapid bounce-back from lockdowns is starting to moderate. However, Sterling wasn’t impacted much by the moderating PMI data. The UK’s first mover advantage on the government’s Covid Strategy might have lent support to Sterling, in my view.

The coming week brings a relatively light mid-summer UK economic data calendar. The British Retail Consortium’s (BRC) shop price inflation in July could well be the main point of interest, given recent overshoots in inflation led by goods prices. There might be a small fall in BRC inflation, reflecting base effects. July 2020 brought an unusual rise in prices – summer sales discounting typically results in price falls, but the pandemic has played havoc with seasonal pricing patterns. The extent to which higher input costs, supply bottlenecks and logistical problems are raising consumer prices at this stage is less clear, but this could remain a source of upside inflation risks. With the economic calendar relatively light, the ebbs and flows of the wider market sentiment look set to continue to be the major driver of Sterling movements in the near term, in my view.

United States: Federal Open Market Committee (FOMC) in focus this week

Last week proved to be quite a round trip for risk sentiment and the USD. The dollar extended gains in the first half of last week as the wider risk-off market sentiment amid rising Covid infections and global growth concerns boosted the demand for safe-haven assets. However, the USD pared some of its earlier gains later last week as the risk sentiment improved.  Friday’s US PMI data were mixed with a disappointing lean, with manufacturing PMI rising to a record high of 63.1 in early July from the previous historic high of 62.1, and services PMI dropping to a five-month low reading of 59.8 from 64.6 in June.

The stakes for Wednesday's Federal Open Market Committee (FOMC) meeting (which were already high) could be even higher with risk appetite and growth expectations globally turning over. In times like these, a super-easing monetary policy stance from the Fed might be needed to calm financial markets. However, given the inflation overshoot, and uncertainty over how lasting high inflation could be, whether the Fed will maintain its accommodative stance in the FOMC meeting this week will need to be watched.

Meanwhile, Q2 GDP data will be released on Thursday, which is widely anticipated to have been exceptionally strong. Other data to be released this week that may condition views on the economy include durable goods orders, consumer confidence, and personal income and spending.

Europe: ECB maintains accommodative policy stance

EUR/USD rose above 1.1820 after the European Central Bank (ECB) meeting last week but failed to hold the gains and traded lower to levels around 1.1750. The ECB maintained its accommodative monetary policy stance and suggested that it will only react to more robust expectations of inflation. Lagarde also said that "no one [in the Council] wants to tighten prematurely...informed by past experience and recent history". Apart from the forward guidance on rates, little else was revealed in the meeting with asset purchases expected to continue at the current pace. More details might be discussed and redefined in the September meeting or later, which could impact the EUR. July PMI data released last Friday showed that the region’s recovery remains on track, supported by increasing momentum in the services sector. However, recent resurgence of Covid-19 cases creates downside risks, which will need to be watched.

This week will see the release of Euro area Q2 GDP, which will likely show the region’s solid growth in the second quarter. The impact of recent Delta variant developments might not be reflected in the growth data though. July inflation data to be released on Friday might provide some insights on the region’s inflation developments and its possible impact on the central bank’s monetary policy outlook.

Central Banks: Federal Open Market Committee, Banco de la República, National Bank of Hungary Decisions

The Central Bank of Russia hiked rates by 100bps in its July meeting last week amid mounting inflation pressures, following 50bps of tightening in both June and April and 25bps in March. In contrast, the ECB maintained its accommodated monetary policy stance, as has been discussed above. Bank Indonesia kept policy settings unchanged, expecting recovery to be delayed but not derailed from the recent Covid outbreak. Policy normalisation could eventually be on the central bank’s agenda, but more likely to be happening next year. The South African Reserve Bank kept rates unanimously on hold at 3.50%. Downside risks on Gross Domestic Product growth were noted, while Consumer Price Index projections were kept below target, suggesting that rates could be lower for longer.

The National Bank of Hungary will meet on Tuesday, and a 25bps hike seems likely, with the MPC having committed to a hiking cycle and the need for “decisive” tightening. Inflation and expectations remain high, while one of the fastest Covid vaccination rates in Europe suggests room for domestic demand to push up prices. Wednesday will see the US FOMC meeting and officials will likely have a wide-ranging discussions on plans of reducing asset purchases, and guidance around this from the press conference will need to be watched. Banco de la República, Colombia’s central bank, will meet on Friday and might maintain the easing stance and keep rates unchanged. Inflation eased a bit since the last meeting and activity data has been mixed and complicated by substantial base effects. While the Colombian Peso (COP) underperformance over the past month might come up at the press conference, which is an area to watch.

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