What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: Is the next move in GBP/USD 5 cents higher, or five cents lower?
The pound’s progress against the US dollar has been stalled lately. The peak, reached just over a month ago, at $1.4237, has never looked like being challenged subsequently, and last week it tested beneath $1.37, as fears over vaccine supplies grew. Some positive news from the EU Council, which pulled them back from the brink of a vaccine export ban despite the support from France and Italy, steadied risk appetite and GBP/USD towards the end of the week, but the pressure remains.
In terms of data and surveys, the figures from the UK last week were a mixed bag. The labour market reported a smaller reduction in employment in January payrolled employment on the rise in February, but a larger rise in the claimant count in February. The consumer price inflation data reported a smaller year on year rise in February, with the headline inflation rate dropping to 0.4% and the core inflation rate to 0.9%. Provisional March PMI (Purchasing Managers’ Index) survey data for manufacturing and services reported much stronger than expected activity, particularly for services, suggesting the UK’s recovery could be more robust in the unlocking phase than previously predicted. Finally, on Friday, the retail sales figures for February reported a modestly more robust rebound than forecast, but that still left retail sales volumes considerably lower than in at the end of 2020, and a sizeable drag on Q1 GDP (Gross Domestic Product) growth.
Given the mixed bag of data, but some positives around the recovery’s strength, it was a surprise to see the GBP pushing lower, but that is most likely because the FX markets are already largely discounting that recovery. So should the markets be worried about the downside or upside for the GBP against the USD?
With a limited data calendar this week, the short term risk for GBP/USD is, to my mind, to the downside. There might not be a full 5 cents of downside risk, levels around and just above the $1.33 region might offer support, and in the first instance $1.35 will be the next target to focus on. Moreover, it is dependent on the political climate as much as the economic outlook, since a deterioration in the former is likely to prompt a worsening in the latter.
Final Q4 GDP figures and the final March manufacturing PMI index are the only notable releases this week, and neither are likely to offer much, if any, support for the GBP given previous iterations of these figures having already been released.
It is likely a different situation with regard to GBP/EUR, which could still reach and breach previous highs, but more because of EUR weakness rather than GBP strength. The comparisons of vaccination programmes will continue, with the UK continuing to offer more jabs per head of population consistently versus the European Union, but Q2 should see a sharp increase in the number of vaccines available to the EU.
United States: Ahead of the US payrolls, data shows strength (apart from housing)
The US continues to report strength in the recovery, although last week saw a chink in the armour of the housing market, which recorded sizeable falls in the pace of existing and new home sales. That shouldn’t be particularly alarming, since recently these numbers have hit multi year highs, but this could be reflective of less generous market conditions in terms of mortgage finance, after the surge is US yields.
The strength of the US data was undermined by figures at the end of the week, which reported a larger than expected decline in personal income and spending in February. However, these came after the figures surged in the January readings, thanks to stimulus cheques from the US government. With more stimulus having been sanctioned by Joe Biden’s new administration, expect a sharp rebound in March also.
Consumers are more confident than they were a month or two ago, and this is as the vaccine rollout continues to support a return to normality. The headline case numbers (new infections) are still relatively high, fluctuating between 40-60k cases per day, but the numbers of new deaths are far lower than across continental Europe, suggesting that the vaccine programme is working.
This week, the focus remains on the US economy, with arguably the most important release of the month. March non-farm payrolls data are expected to record another bumper month of employment growth. There are other releases, such as the manufacturing ISM (Institute for Supply Management) for March, but this is unlikely to offer a sufficiently surprising outturn to materially move market thinking.
As far as the US dollar is concerned, the currency pair to watch is EUR/USD. Is there more dollar strength to come? EUR/USD is likely to provide all the signals required.
Europe: Surveys improve; Europe avoids vaccine export ban and threat to its own ingredients supply
Last week saw a sharp improvement in the survey data from Euroland. Firstly, the manufacturing and services PMIs for March (provisional) reported much stronger activity in both sectors than expected, especially given the restrictions in place across much of Euroland. Following on from that, the German March IFO (Information and Forschung / Germany’s Institute for Economic Research) business climate index rose sharply as well, thanks largely to a sharp increase in the expectations index.
The improvements in the surveys were largely ignored by the markets though, as political issues and potential export bans for vaccines and ingredients dominated the headlines. Any such export ban would, in all likelihood, undermine the recovery of the whole continent, since it could materially undermine the supply of vaccines in Q2. It would also play negatively in terms of the EU’s reputation for being pro free trade, instead looking protectionist and interventionist. Towards the middle of last week, there was a discovery of 29m doses of vaccine in an Italian facility. This prompted the European media to wrongly speculate that these doses were destined for the UK. There weren’t, and the EU was left with additional questions to answer as Novovax have delayed signing a contract with them after issues sourcing raw materials. Even a lowering of the temperature between the EU and UK was not viewed as particularly positive, as the markets want concrete action on vaccine supply, not more words of encouragement.
The EUR bounced back from its lows towards the end of the week as the temperature on the vaccine issue was brought down a few notches, but overall, the outlook for the EUR remains negative, as monetary policy tightening expectations are pushed out, relative to those in the UK and US. Indeed, it has begun this week in negative fashion also.
There are no significant data or survey releases that are likely to support the EUR this week. Inflation data from Euroland is already expected to report a rebound in headline rates, and so an outperformance against those expectations isn’t likely. German unemployment figures for March, released on Wednesday are also unlikely to sufficient outperform expectations so as to benefit the EUR.
Central banks: All stand pat last week; few announcements this week
Last week’s myriad of central bank meetings were fairly dull, with the main decisions, from the likes of the China, Hungary, Thailand, Czech Republic and Switzerland never expected to deliver anything other than no change. The Swiss National Bank softened its language on the need to intervene in FX markets, and that was unsurprising given that the Swiss franc has weakened over the course of 2021.
The People’s Bank of China is withdrawing some monetary stimulus already, but will be keeping a close eye on equity markets, which have taken a tumble in recent weeks. The SARB (South African Reserve Bank) and Bank of Mexico (Banxico) also both left policy unchanged. The SARB indicated that the next move in interest rates might be upwards as inflation was projected higher than previously forecast, and Banxico’s concerns over future inflation trends seemed to close the door on any additional monetary loosening.
This week we only have one central bank meeting due. On Tuesday, the Chilean central bank meet and are expected to leave interest rates unchanged. If anything the central bank might be slightly more hawkish, arguing that the an increase in inflation pressures, and additional fiscal support from the government, reduce the need for any further monetary loosening.
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