FX outlook: Parky’s quick take – 5 July 2021

06 July 2021

Neil ParkerFX Markets Strategist

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

United Kingdom: GBP takes a dive ahead of quarter end

The past week saw the evidence from the UK daily infections data of a further increase, with the daily total reaching its highest level since 25th January. The numbers of serious illness remain low though, as do the numbers of deaths, both of which would have been expected to increase more sharply by now. At the peak of the previous outbreak, there were 81,518 cases reported in a single day, and over 39,000 people in hospital with Covid. Currently the numbers in hospital are around 1/20th of that previous peak.

In terms of data and surveys, the news from the UK remained positive. The housing market figures from the Nationwide reported a rise in prices across the country in June, to the highest annual growth reading since November 2004. There was also a further spike in consumer lending figures for mortgages, with approvals rising unexpectedly in May, and the amount lent more than double what had been lent in April. The UK final Q1 Gross Domestic Product (GDP) figures were slightly worse than expected however, the contraction revised to 1.6% quarter-on-quarter from 1.5%, with private consumption acting as a bigger drag on activity and government spending providing less of a lift to output. The UK final June manufacturing Purchasing Managers’ Index (PMI) figures were revised down, albeit only marginally, and still indicated a very rapid pace of recovery for the manufacturing sector.

This week, there are no particularly important releases due, except for the monthly GDP release for May on Friday. That should point to additional strength in the UK economy, but it is where the strength is coming from that will be of interest. Given the weakness in May retail sales figures, released last month, it will be interesting to see if the remainder of the services sector picked up the slack. Have the manufacturing and construction sectors bounced back after the falls in output seen in April? Ahead of that, the June PMIs from services (Monday) and construction (Tuesday) will offer insight into how these sectors finished the quarter. The final June services PMI index rose from 61.7 in the initial reading to 62.4 in the final reading, only marginally below the final May reading.

The GBP finished Q2 on a downer. Against the USD it dipped towards its lows, whilst it held up better against the EUR into the quarter end, but still hasn’t made any headway on recent highs. For Q3, the questions regarding the GBPs performance will remain. There will be a lot of interest in the August Bank of England meeting, Monetary Policy Report and minutes, as well as the replacement of outgoing Chief Economist Andy Haldane. Could there be a change of direction on monetary policy sooner than expected? What other triggers for renewed GBP strength could there be? For this week at least, the GBP looks as if it will remain on the defensive.

Europe: Euroland data points to further strength

The Euroland economy has performed better than expectations in recent weeks. Since the European authorities stepped up the vaccination effort, and the number of new infections began to decline, the news from the data and surveys has been notably more optimistic.

Last week was no different, with the survey evidence from Euroland and the individual countries continuing to outstrip consensus forecasts, and most of the data beating expectations as well. There was an upward revision to the final June manufacturing PMI reading from the provisional one, stronger business confidence readings across the board from Euroland, generally better than expected unemployment data (Germany and Spain) but a modest pull back in the rate of Euroland inflation in June.

Overall, the improvement in the economic activity and sentiment indicators hasn’t re-ignited tensions on the European Central Bank, that continued to push the narrative that the inflation pressures being felt are temporary, and that the economy remains in need of monetary support to recoup the lost economic output. It also didn’t offer the EUR support last week, which closed the quarter only marginally higher than where it began, having previously looked set to challenge multi-year highs.

For this week, aside from the final June services PMI index, already released and showing additional strength in the Euroland services PMI index, there are further important surveys and data due. On the survey front, the July survey from Zentrum für Europäische Wirtschaftsforschung (ZEW), Germany’s sentiment index survey, on Tuesday will be closely watched, and should record a further sharp improvement in current conditions, according to consensus forecasts. There is also German factory orders data for May released on Tuesday, ahead of a plethora of May industrial output figures from Spain, Germany, Ireland, Holland, Finland, Austria and Italy.

None of the releases for this week should offer the EUR any renewed support against the USD, but the markets might continue to look more favourably upon the EUR than other majors.

United States: US payrolls report posts bumper employment increase

I’d have to hold my hands up and say last week I called the jobs report completely wrong. The anecdotal evidence from surveys and other labour market indicators suggested that performance of the US labour market was likely to have been weaker in June than in May. However, the June non-farm payrolls outturn of 850,000 outstripped the consensus forecasts of 720,000 and May’s revised reading of 583,000. That said, the US figures on unemployment contradicted the optimism from the payrolls, the rate unexpectedly rising from 5.8% to 5.9%, and labour force participation remained at 61.6%, 1.7 percentage point below pre-pandemic levels.

The market response was mixed, with equities rising, bond yields falling and the USD selling off in the aftermath of payrolls release, which capped off a week where the US data and surveys were themselves varied. The outlook for US dollar is unclear. It bounced from its lows late in May, to end the quarter heading back towards its highs. Whether there will be the support for a further rally is dependent on the political news and monetary policy direction.

This week will see at least some further development on monetary policy, with the release of the June Federal Open Market Committee (FOMC) meeting minutes from the US. The minutes are likely to better highlight the concerns of some FOMC members, which prompted an increase in interest rate projection contained in the dot plots. Ahead of the FOMC minutes, the US Institute for Supply Management (ISM) services index for June on Monday, but the data calendar is a little thin otherwise. Q2 earnings season is about to quick off in earnest, and will that contain a few surprises to drive market direction?

FX markets seem range-bound at the moment, but can this lack of direction last for much longer? Which way will the FX markets break when they’ve eventually had enough?

Central banks: Sweden and Colombia stand pat last week; no hikes expected this week either

The Riksbank left interest rates unchanged last week as did the central bank of Colombia. The decision for the Swedish Riksbank was an easy one, with inflation having dropped back below target, the unemployment rate rising unexpectedly in May, and confidence indicators dropping back. The Riksbank struck a dovish tone, suggesting that the rate path would see interest rates remain at zero until Q3 2024. As for the Colombian central bank, they had seen the central banks of Brazil and Mexico raise interest rates recently, but did not join in with the tightening, despite increasing its estimate for the 2021 GDP growth and elevated inflation pressures.

This week’s central bank meetings include the Reserve Bank of Australia (RBA), the Central Bank of Sri Lanka, the National Bank of Malaysia and the National Bank of Poland. None of these central banks are expected to tighten monetary policy, but for the RBA a review of the bond buying programme is due, and there could be a further modest reduction in the weekly bond purchase programme, despite the renewed flare up of Covid infections recently. This week’s first central bank meeting is the Bank of Israel’s decision on monetary policy. There is no expectation of any change in policy, with the recent increase in Covid infections prompting a re-introduction of face masks in indoor retail and public spaces. The result will come after this publication is released.

To read the previous quick take, click here

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