FX outlook: Parky’s quick take – 28 June 2021

28 June 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: BoE (Bank of England) hints at earlier hike because of inflation risks

Last week’s big event of the week was the Bank of England Monetary Policy Committee on Thursday. Prior to that, Wednesday’s release of provisional June manufacturing and services PMIs (Purchasing Managers’ Index) recorded a drop in both manufacturing and services activity. The readings were still high, but indicate that the momentum behind the rebound may be slowing. As for the other surveys, the June GfK (Growth from Knowledge) consumer confidence survey reading was unchanged at -9, and the June CBI (Confederation of British Industry) distributive trades survey rose to 25, from 18 in May. The mix of news left the GBP in something of a state of limbo, and by the close of the week it was only marginally higher against the USD and marginally weaker versus the EUR.

As for the Bank of England Monetary Policy Committee meeting, that left monetary policy unchanged, with a vote 8-1 in favour of the decision, with only outgoing Chief Economist Andy Haldane voting for an immediate reduction in the total asset purchase programme of £50bn. The forecasts for growth and inflation have also been revised up since the May monetary policy report, and the BoE also noted that the inflation rate would exceed 3% for a temporary period. Any move above 3% would require the Governor, Andrew Bailey, to write to the Chancellor of the Exchequer and explain what, if anything, the central bank intends to do to bring the inflation rate back to target.

There were a small number of additions to the UK government’s green list of countries, including the Balearics, Caribbean islands and Malta, but also a number of warnings from the travel industry that the government’s cautious approach to re-opening the travel sector risked further permanent damage being done. Moreover, the hospitality sector has warned that the delay to the remaining restrictions being lifted threaten further closures and job losses.

For this week, the news flow is likely to be a lot less interesting from the UK. A raft of secondary consumer lending, housing and surveys are unlikely to prompt much market movement on Monday and Tuesday, and neither should the final Q1 GDP (Gross Domestic Product) figures, due for release on Wednesday. The final June manufacturing PMI, released on Thursday, will only be watched in the sense that it might see a further revision to the downside, indicating a slowing in the pace of manufacturing expansion versus initial estimates.

Risks are that the GBP comes back under pressure next week, as markets await key US data.

United States: US data and surveys disappoints; June payrolls in focus

The US data and surveys last week were, on the surface, disappointing. First up, existing and new home sales data for May suggested a possible stabilisation in existing home sales, but weakness in the sales of new homes. The PMIs were also a mixed bag, manufacturing activity picking up further, but the services index dropped back fairly sharply, indicating a slowdown in services growth. There was also disappointment in the weekly jobless claims figures, which recorded very little improvement versus the previous week. Finally, the personal income and spending figures for May recorded a further sharp drop in income as the effects of the stimulus wore off, and the personal spending figures were flat versus April, although April spending figures were revised up. The biggest disappointment was the final June University of Michigan consumer sentiment figures. These recorded a drop in consumer sentiment, from the initial reading.

In terms of the Biden administration’s efforts to secure a bi-partisan infrastructure deal, that seemed to have been given fresh impetus last week, with a minority of Republican Senators offering their support to the deal, worth just short of $600bn. However, some of the 11 Republicans were under pressure to switch from support to opposition, after the President signalled that its signing would be inextricably linked to a multi-trillion dollar spending package for education and social security.

This week, the key release is the June US non-farm payrolls data on Friday. These figures are expected to record a net payrolls growth of 700,000. After the strength in last month’s payrolls, which grew by 559,000, the outlook for employment seemed to have improved. Since then though the survey evidence and weekly jobless claims point to weakness in the labour market revival. The risk is that the jobs growth data is less than half the consensus forecast.

For the USD, the recent strengthening against other major currencies suggests an effort to find a base after persistent weakness. The data and surveys aren’t necessarily the driving force behind the dollar’s recovery, and nor is it the case that the markets are seeing risk appetite decline. Indeed, strength in the equity markets may be one factor that will continue to prevent more widespread USD gains over the course of this week.  

Europe: Euroland surveys point to additional recovery strength

The news from Euroland has continued to be positive. Looking first at the Covid infection numbers, they have continued to decline, such that the figures from countries that had a high rate of infection only six weeks ago now have levels that suggest a very low prevalence of Covid in most Euroland member states. Indeed, in the likes of Germany and most other European nations the rates of infection are a small fraction of the rates of infection in the UK. The easing of restrictions may see a renewed spike in case numbers, but now that the pace of vaccinations has picked up, the outlook for the Euroland economy continues to improve.

From the data and survey front, the key releases were first the provisional June manufacturing and services PMIs, both of which pointed to additional strength in activity, and then the IFO (Information and Forschung, Germany’s Institute for Economic Research) business climate survey, also for June. It was this latter release that left a more lasting impression, and for all the right reasons. Both the current climate and expectations components rallied, suggesting that the pace of recovery has accelerated, and would continue to do so in the coming months.  

That said, there were further comments from members of the ECB (European Central Bank), including from President Christine Lagarde, which downplayed the risks of recent increases in inflation in the US spilling over onto the European mainland. Moreover, the removal of some of the fiscal support for Euroland economies was likely to counteract any domestically generated inflation pressures, such that the ECB would be able to persist with ultra-loose monetary policy for a while longer. All in all, last week suggested that the EU was benefiting from the best of all worlds: a robust recovery and limited signs of domestically generated inflation pressure.

For this week, the key releases are all consumer price inflation data. We get individual countries data early in the week from the likes of Spain, Germany, Portugal, France and Italy, and on Wednesday the Euroland aggregate is released. Also this week, May unemployment data from Euroland is set for release. Although slightly more historical than the US unemployment data, these figures could still surprise with a further reduction in the Euroland unemployment rate to under 8%. If they do, that could prove marginally supportive of the EUR against the likes of the USD and GBP. However, this week will be driven by risk appetite. If there is a further improvement in risk appetite via equity market gains, then the EUR will be supported. If alternatively, there is some pull back in risk appetite, the weakness as far as the EUR is concerned is likely to be greater than the additional upside, in my view.

Central banks: Hungary and Czech Republic raise interest rates as expected; Mexico surprises with a hike

Last week’s central bank meetings predominantly focused on the possibility of interest rate hikes. The Hungarian and Czech central banks were expected to hike interest rates, and duly did so on Tuesday and Wednesday, whilst central banks of Thailand and the Philippines held policy steady on Wednesday and Thursday. The Thai central bank lowered growth forecasts and expected a persistent inflation undershoot, whilst in the Philippines the central bank vowed to continue to support the recovery, despite raising the 2021 inflation forecast. The surprise came from the central bank of Mexico. Banxico was expected to keep interest rates on hold, but increased the overnight rate from 4.00% to 4.25%, in response to higher than expected inflation pressures and a rise in inflation expectations. Banxico was quick to stress that markets should not see this as the beginning of a rate hiking cycle, but in response to those building inflation pressures and a weaker Mexican peso.

For this week, we have only the central bank of Columbia and Swedish Riksbank announcements. Neither are expected to move interest rates, but the outlook for monetary policy in both countries continues to be driven by the recovery prospects of economies and the risks to inflation. Neither central banks are likely to change that risk assessment much either, with Columbia’s economy already predicted to expand well into the double digits. However, after the Brazilian and Mexican central banks both raised interest rates, will Colombia need to follow suit regardless?  

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