Neil Parker, our FX Markets Strategist, shares his views on the currency markets this week
United Kingdom: UK rate rise in December looks a lot less likely
The alarm bells have been rung as far as the markets pricing for a rate rise in December. As I’ve mentioned in recent weeks, the markets looked over-confident, and the Bank of England (BoE) have equally suggested as much. Commentary from the Bank of England’s Chief Economist and Governor over the course of last week again indicated that a hike could come as early as December, but it was by no means a forgone conclusion. The rate hike train was then derailed by a new variant of concern being found in Africa and in at least one European country (Belgium).
With the risk that this will create the need for renewed restrictions and lockdowns, the UK financial markets were suddenly much less confident of the need for an interest rate rise, or indeed the sustainability of economic momentum into the end of 2021. Last week also saw the preliminary November Purchasing Managers’ Index (PMI) figures for manufacturing and services: these recorded a modest improvement in the manufacturing index, but a weakening in services. There really wasn’t much else to focus on in terms of data or surveys, with Confederation of British Industry surveys of industry and the retail sector suggesting strength in both, but the markets ignoring them.
This week is fairly quiet in terms of releases as well. The Nationwide house prices data for November are due at some point, and October lending to individuals data from the Bank of England are due to kick things off. In the remainder of the week, some low-grade survey data from Lloyds and the British Retail Consortium won’t generate much interest, but final November PMIs for manufacturing and services activity could prove insightful.
If these surveys record a reduction in the readings seen provisionally, the GBP could come under renewed pressure, and heading into the December BoE Monetary Policy Committee meeting, the downside risks around GBP remain. GBP/EUR dipped below €1.18 last week, will the pressure persist throughout this week?
United States: Does the US have a lot to give thanks for; US payrolls provide next test
Last week was a holiday foreshortened week for the US financial markets. The Thanksgiving Day holiday on Thursday was preceded by concerns over risk appetite in financial markets, which were then exacerbated by the discovery of a new Covid variant in Africa, which was more transmissible than the Beta and Delta variants.
There was a mixed bag of US data and surveys, with some signals of a weakening in the housing market, but other signals of a sharp improvement in consumer spending. The Q3 Gross Domestic Product (GDP) figures were revised down marginally, and the University of Michigan consumer sentiment figures for November bounced from the provisional reading, but not by much. So does the US have a lot to give thanks for, or are the figures reporting signs of a weakening in activity as we head into the end of the year?
The USD weakened towards the end of last week, as markets became less confident in the need for a faster pace of tapering of the Federal Reserve’s asset purchase programme and also the prospective pace of interest rate tightening in 2022. The fall in US yields indicates that markets now believe fewer interest rate hikes will be necessary over the course of 2022, and, with the risks of a resurgence in Covid from the new variant, markets could revise down those expectations further.
As for this week, the markets will be focused on the non-farm payrolls data for November, released on Friday. These figures, along with the Fed Beige Book, which is released on Wednesday evening, will be a significant determining factor as to whether the Fed increase the pace of the asset purchase taper or not. On balance, they may not increase the pace this time around, with the pace of improvement in employment more likely to be slower than faster in November.
Europe: Euroland carries momentum into latest lockdowns
The last week saw a drop in Euroland consumer confidence in November, a downgrade to German Q3 GDP growth and a worse than expected outturn from the German business climate index for November. However, that was the worst of things in terms of the surveys and data.
Manufacturing and services PMIs reported improvements, with the jump in services activity far more impressive, and neither were expected to improve. Equally, French business confidence rose unexpectedly in November, as did Italian November manufacturing confidence and economic sentiment. The Euroland economy, with the exception of Germany, seemed to carry economic momentum into the latest period of Covid restrictions. This was a surprise to markets, which have been selling the EUR aggressively for several weeks now.
There are some signs from the European Central Bank (ECB) that decisions are becoming more fractious. Notably, ECB Executive Board member Schnabel suggested that the recent upsurge in inflation might be less temporary than previously forecast, but other ECB members remain less concerned by recent inflation, driven by supply chain issues. The collapse in oil prices, seen last Friday, could help allay fears of persistent inflation problems for 2022 and beyond.
This week’s major releases from Euroland include French and German provisional November inflation data, which are expected to report a further rise in headline and core inflation pressures. Also due for release are revised Q3 French and Italian GDP data, which are not expected to record any change to previously recorded growth figures, and the final November PMIs for manufacturing and services. It is unlikely that any of these figures will alter market sentiment materially, but it will be interesting to see whether the EUR can hold onto, or even build on, recent gains against both the USD and GBP.
Central banks: New Zealand hikes again; no important central bank meetings this week
Last week’s central bank meetings included China and Israel, where both left the policy rate unchanged, and also the meetings of the Reserve Bank of New Zealand (RBNZ) and central bank of South Korea, where both raised interest rates by 25 basis points to 0.75% and 1% respectively.
Inflation risks remain a key reason for central banks to be adjusting monetary policy, and the RBNZ talked about the need for further tightening, if inflation expectations continued to remain elevated, as is likely.
As for this week, there are no important meetings due and market focus will continue to be on the inflation risks and Covid developments around the globe. Markets may well remain volatile, with volumes likely to reduce as we head towards year end.
View last week’s Quick Take.
For more FX views and insights, visit our FX Insights Hub.