UNITED STATES: USD weaker amid ‘a lack of signal’ from Powell, Non-Farm Payroll in focus
The ebb and flow of summer markets continued this week, with risk assets finding some footing, especially early in the week. But the evolution of Fed policy, as well as the differentiated Covid-19 outbreaks and policy responses across the world, remain a headwind. Case growth in the US has worsened to a point that some measures may be showing signs of shifting behaviour – lockdowns or not.
The USD sold off last Friday, after Powell’s much anticipated Jackson Hole speech failed to provide clear signals of an imminent announcement to reduce asset purchases despite continued discussion of cutting asset purchases. With the Fed not yet changing its tune, this Friday’s Non-Farm Payroll (NFP) stats will be critical with some members openly advocating a September announcement of reducing asset purchases based on strong readings. Good news on US jobs may be bad news for more risk-oriented assets, but good news for the USD, in my view.
UNITED KINGDOM: Sterling extends gains, exit strategies in focus
Sterling extended last week’s gains as the dollar traded lower amid improved risk appetite. There appeared to have been a few worries for UK assets around the upcoming return to school and Covid, given rising cases in Scotland where schools have already returned. However, the UK doesn’t yet stand out, particularly on severe outcomes. Exit strategies will likely continue to be the focus. The UK has a well-defined exit strategy and the hurdle for another wave of restrictions seems extremely high, which can play Sterling positive, in my view.
This week brings a relatively light late-summer UK economic data calendar with some final revisions to PMI (Purchasing Managers’ Index) data. There may be no material revisions to the final PMI surveys for August, which could remain at elevated levels, consistent with ongoing above-trend economic growth as the UK pushes ahead with its exit strategies.
EUROPE: Improving EUR/USD outlook amid relative growth expectations
EUR/USD is trading higher above 1.18 amid improving market sentiment and a weaker dollar. As the US Covid-19 situation worsens, Europe suddenly looks better placed than most on Covid trends and exit strategies. The region’s economic data have been resilient and showed signs of acceleration on lockdown exits. August preliminary PMI data released last week showed a small dip in activities, but the overall composite reading of 59.5 still signals robust expansion across the region, even though it was down slightly from 60.2.
The region’s economy has enjoyed a robust rebound and looks to be carrying the bulk of that momentum through Q3, which should still mean a strong additional recovery following the 2% quarter-on-quarter growth in Q2. Relative growth expectations in the region will likely play positive to the EUR against the USD in the near term, in my opinion.
This week will see preliminary European inflation data and final PMIs, which could provide further insights on the impact of the Delta variant on the August economic activity.
CENTRAL BANKS: Central Bank of Chile (BCCh)
Bank of Korea (BoK) raised policy rates by 0.25% to 0.75% last week. Meanwhile, growth forecast for this year was kept unchanged from May at 4%, while inflation outlook was raised to above target to 2.1% from 1.8%. Whether there will be further rate hikes in the coming months might need to be watched. Bank of Israel (BoI) kept policy rates on hold last week. Despite the rebound in economic activity, the surge in Covid cases could be a key factor in keeping the policy settings unchanged. Israel is seeing a rapid rise in cases despite ~63% of the population being fully vaccinated, which could be a risk to watch. National Bank of Hungary (NBH) delivered a third monthly 30bps hike to the policy rate last Tuesday and committed to more tightening until inflation outlook recedes. In the meantime, the NBH started reducing asset purchases by cutting the weekly target of government bond purchases.
The central bank of Chile (BCCh) will meet next Tuesday, and they will likely increase the pace of rate hikes to 50bp to bring policy rates to 1.25%, following stronger inflation pressures amid a very accommodative fiscal stance. July inflation surprised significantly to the upside to reach a new high at 4.5% as domestic demand has recovered, the peso has depreciated, and oil prices remain high. Meanwhile, Covid cases have declined materially. Furthermore, the upcoming elections imply further stimulus policies, including a fourth pension withdrawal on which Congress will vote the following week and has been signalled as a key risk for inflation by the central bank. The alternative is a 25bp hike, with a clear option to move to steps of 50bp at the subsequent meetings.