FX Outlook: Parky’s quick take – 30 November 2020

01 December 2020

Neil ParkerFX Markets Strategist

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

United Kingdom

With or without EU

Last week saw talks between the UK & EU resume after a short break, because one member of the EU’s negotiating team tested positive for COVID-19. There was some positivity regarding a deal being struck from the UK side, but warnings again from the EU that the UK needed to move on its negotiating position or no deal could be agreed. EU negotiator, Michel Barnier, was preparing to offer to return up to 18% of the value of the EU catch to the UK, in an attempt to secure a trade agreement. However, according to reports, the UK rejected that offer, before it was made, as it would still mean the EU having access to 80%+ of fishing in UK waters post Brexit, and the EU withdrew it. UK PM, Boris Johnson, made it clear that a deal was there to be done, but that the UK was prepared to walk away with no deal, and Australia style arrangements with the EU.

The other news, which perhaps put the UK economy and GBP on the defensive last week, was the announcement that England would come out of lockdown on 2nd December, but that many more areas would be in Tier 2 and Tier 3 versus pre the second lockdown. In number terms, over 23.6 million were in Tier 1 prior to lockdown, but under 720k will be, come the 3rd December. The government committed to reviewing the Tiering system regularly, but that may not prevent a significant rebellion from MPs come next week’s vote in parliament.

There were fairly few data or survey releases last week. Provisional November PMIs (Purchasing Manager’s Index) at the beginning of the week showed stronger than expected manufacturing activity and a less severe slowdown in services, versus consensus forecasts. Later in the week, the CBI (Confederation of British Industry) distributive trades survey reported that retail sales volumes had held up, despite the imposition of the second lockdown, leading some to suspect that online sales had replaced physical high street sales.

Already this week, UK consumer lending figures showed that unsecured borrowing had declined, by a net £600m, Nationwide house prices were up again in November, to a new record high, and the final November CIPS (Chartered Institute of Purchasing and Supply) manufacturing PMI was higher than the provisional reading, at 55.6 versus the preliminary 55.2. 

For the week ahead, the markets will want to see progress being made on a UK/EU trade deal. The November CIPS services PMI on Thursday and the construction PMI on Friday will provide a little interest, but the markets are gripped by developments in UK/EU trade negotiations. Markets are broadly priced for a deal, but either side could still walk away, if it feels the demands of the other are unreasonable. The pound has made additional headway higher against the USD, but the backdrop has been very USD negative lately, so this is more a US rather than UK story. Could it push to new 2020 highs ahead of year end?


Less deflating times ahead?

Last week was very quiet in terms of data and events. PMI figures and German IFO (Information and Forschung / Germany’s Institute for Economic Research) survey, both for November, showed that activity had, unsurprisingly, slowed across Euroland during lockdowns/tighter restrictions. The PMIs reported a very steep decline in services activity, and a much better manufacturing outturn, which is unsurprising, given that manufacturing was likely to remain open during the lockdowns. As for the German IFO, that held up slightly better than expected, but as it predominantly covers industry, that was no surprise either. The euro rallied against the USD last week, helped by improving risk appetite generally across markets.  

There has been a brewing political spat, between the other members of the European Union and the Hungarian and Polish governments, over the EU Budget and proposed bailout package for EU countries. Both governments have been under EU investigation for infractions on democratic standards, and their push back has been against the EU tying funding to EU’s fundamental principles. This is a further, unwelcome distraction, to the EU who are trying to push ahead with re-invigorating the EU economy after the pandemic, with a UK/EU trade deal close to being finalised. The European Council meeting on 10-11 December could see this develop into a major clash, and it could further delay the delivery of COVID recovery funds to the hardest hit economies.

This week has already seen November consumer prices figures from Spain, Italy and Portugal, as well as some preliminary German regional CPI (Consumer Price Index) figures. The expectation had been that deflationary pressures might have been easing a little, but that’s not what these data showed, with the Spanish and preliminary German figures worse than expected but the Italian consumer prices figures better than expected. Tuesday sees final November manufacturing PMI figures released for Euroland, along with November German unemployment figures and November Euroland consumer prices figures. Thursday sees the final November services PMI from Euroland released, and that’s it in terms of major releases. Nothing to upset the euro in these data or survey releases, given what’s already known.

United States

Beige Book may be very colourful

Last week’s minutes of the Federal Reserve’s 5th November FOMC (Federal Open Market Committee) meeting indicated that the Fed were ready to look at options regarding additional monetary expansion, if necessary. The data and surveys from the US economy also pointed to some strength as far as the PMIs were concerned, and additional positive data from the US housing market, but there were also some worrying aspects. Consumer confidence fell in the November readings from the Conference Board and University of Michigan, whilst jobless claims figures reported another rise in claims, versus expectations that they would fall back slightly. Fiscal stimulus continues to look a dim and distant prospect, beyond plans to fund the ongoing operations of the US government.

This week sees the US focused on the Federal Reserve’s latest assessment of current economic conditions, or Beige Book, followed by the non-farm payrolls data for November. The Beige Book could be rather colourful in its description of economic activity, which seems to be patchy, with a number of sectors suffering disproportionately, as the coronavirus pandemic continues to grip the US. Indeed, given recent evidence, the Fed Beige Book could indicate that the pace of expansion is slowing, and that inflation pressures are easing, which would provide further support to the case for more/a faster pace of bond purchases in the coming months. As for the payrolls data, that is likely to point to a slowing in the improvement in the US labour market, and a further pull back in average earnings growth.

Overall, with the US government unlikely to break the deadlock on fiscal stimulus, there is no extra pressure on the USD. However, none of this week’s events are likely to offer any support to the greenback either. Heading into year end, the pressures on the USD are likely to remain, but many major currency pairs are in touching distance of previous levels where gains against the USD proved unsustainable previously, which could limit any further downside.

Rest of the world

Sweden surprised last week, and but no likely shocks this week

Last week’s central bank meetings from Nigeria, South Korea, Sweden and Colombia saw no change in interest rates as expected. The Riksbank meeting was more interesting in that it surprised with an expansion of the asset purchase programme to SEK700bn from SEK500bn, increased the pace of purchases in Q1 2021 and opened the door for a greater basket of assets to be purchased also. In the absence of any other movement in interest rates or monetary policy in Europe (excluding the UK) recently, this may be a signal of loosening to come from other central banks in Europe in the upcoming weeks. The krone fell after the Riksbank decision, despite positive outturns from October retail sales and Q3 GDP (Gross Domestic Product) data thereafter.

This week’s central bank meetings include the Reserve Bank of Australia on Tuesday morning, the National Bank of Poland on Wednesday, and the Reserve Bank of India on Friday. Already this week we’ve had the BoI (Bank of Israel), and its decision to leave monetary policy on hold was of no surprise, given the recent actions taken by the BoI. As for the rest, there appears to be no immediate need for additional economic support from any of the central banks, and it is likely that they will all hold a watching brief over the remainder of 2020, looking ahead to the actions of other major central banks and developments in vaccine deployment.

To read the previous quick take, click here

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