FX outlook: Parky’s quick take - 4 January 2021

04 January 2021

Neil ParkerFX Markets Strategist

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United Kingdom: GBP rallies as UK gets trade deal done; rolls out another COVID vaccine 

T’was the night before Christmas is the start of the poem ‘A Visit from St. Nicholas’ by Clement Clarke Moore, but nowhere in that did he mention the trade negotiators would have still be finalising the details of a UK/EU post transition trade deal. The news prompted a rally in the pound and in equity markets, although both were undermined by increasing pandemic lockdown restrictions imposed on much of the rest of the UK, having been imposed on London and the South East just before Christmas as well. The trade deal means some reduction in EU fishing rights in UK waters (a 25% reduction over 5½ years), an end to free movement, consistent rules on state aid, and an end to the European Court of Justice’s jurisdiction on legal matters for the UK. It also means that there will be additional paperwork for transit of goods to and from the EU, but in the early stages of the new arrangement that seems to have posed few problems.  

The UK MHRA (Medicines and Healthcare products Regulatory Agency) also gave approval for the rollout of the Oxford/AstraZeneca vaccine, and that has begun in earnest this week, with AstraZeneca indicating that it can make up to 2m doses available per week, significantly increasing the speed and efficacy of the vaccination programme in the UK. However, with the number of new daily infections persistently above 50k, and the NHS stretched in dealing with the new case numbers, restrictions are expected to be tightened, widened and lengthened.  

In terms of the economy, this week sees only a few important releases due. We’ve already had the final December manufacturing PMI (Purchasing Managers’ Index) released, and that showed a small improvement, to 57.5, on what was already a strong preliminary reading at 57.3. The final December services PMI is released on Wednesday and the construction PMI on Thursday, but there is little else of interest due. For the GBP, the expected news of tighter restrictions might apply the handbrake to recent GBP gains, particularly against the USD  

Europe: Euroland hopes for sizeable recovery undermined by further lockdown  

The signs are that the Euroland economy has carried some momentum through into 2021 was evident in the manufacturing PMI (final December), which, although the Euroland reading fell back slightly, showed strength in Germany, Ireland and the Netherlands. Will there be any improvement in the final December services PMI reading on Wednesday? Probably not, since this sector will be more impacted by the enforced closures of businesses to stem the spread of the virus.  

There are few other releases due this week of any importance. There might be some interest in the Euroland confidence indices, for December, released on Thursday, but this will be seen as of lesser importance to the Euroland flash consumer price inflation figures for December, due on Thursday also. Will the headline rate have improved this time? Most likely, but if it doesn’t it shows that the European Central Bank still have work to do to help transform the domestic economic conditions prevalent across most of Euroland.   

United States: US focus on payrolls 

The US economy will have been relieved by the news that the bi-partisan fiscal relief bill made it through both Houses of government and was signed into law by the US President on the 28th December. Months of wrangling by both sides has undoubtedly undermined the prospects of a rapid recovery in the US economy, especially with the numbers of new daily infections still running in the hundreds of thousands.  

The data calendar is relatively light this week, with one notable exception, the December non-farm payrolls release, which is due on Friday at 13:30. The weekly jobless claims data has been disappointing lately, and so it is not surprising that the market consensus is for a mere +50k net new jobs to have been added in December. The outlook for US jobs market is likely to improve in 2021, although the momentum is likely to be heavily skewed into H2 2021.

With the rollout of vaccines increasing in pace in the US, the new President, Joe Biden, may be able to dispense with additional fiscal support measures and focus instead on the economic recovery of the US.

Central Banks: Nothing scheduled 

This week sees no central banks due to announce on interest rates. However, there will be comments from central bankers, and they could be both optimistic about the outlook for economies, whilst at the same time pessimistic about the present. Given the developments in vaccines, but also new strains of the virus being discovered, that is not a difficult stance to square.    

To read the previous quick take, click here

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