FX outlook: Parky’s quick take – 6 April 2021

29 March 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: UK shows economic resilience; pound holds its ground, for now

Last week, the economic data and surveys generally pointed to a more solid performance from the UK into the end of 2020, and a stronger finish to Q1 2021. The Q4 GDP (Gross Domestic Product) figures reported growth of 1.3% quarter on quarter an upward revision from the 1% growth previously estimated. That wasn’t thanks to stronger consumption spending however, but instead a smaller current account deficit, stronger government spending and a larger bounce in investment.

The revised March manufacturing PMI (Purchasing Managers’ Index) rose to 58.9 from an original 57.9, the highest reading since 2011, whilst the factory output reading jumped to its highest reading since November, and recorded the 10th consecutive month of gains. However, the news wasn’t all positive, with the February net lending to individuals data reporting a further £1.2 billion reduction in unsecured lending, and the March Nationwide house price index reporting a fall of 0.2% in prices versus February.

The pound managed to hold its ground through the course of last week, but wasn’t able to recover any of the lost ground against the US dollar. Meanwhile the news from the vaccine programme was the switchover from first to second doses, with the latter topping 400k for the first time in figures released on Thursday.

This week is another quiet data week. Revised services PMI figures for March, released on Wednesday, are expected to show strength in the services sector as the UK continued with its unlocking programme. The remainder of the week sees only the RICS (Royal Institution of Chartered Surveyors) house price balance data for March and the construction PMI index for March released. These shouldn’t be sufficient to support any additional rally in the GBP, and there are unlikely to be any announcements from the government that will help either. Will the pace of UK vaccine deployment continue to outperform the government’s own expectations, and if it does what will this mean for the unlocking timetable, if anything?

United States: Biden’s transformation plan doesn’t wow lawmakers; Payrolls sizzle

Last week saw lots of secondary data and surveys, which were of passing interest versus the release of March non-farm payrolls data on Friday. That recorded 916k jobs created in March, almost 50% more than the consensus forecast according to Bloomberg. Moreover, there was a pick up in the pace of jobs growth in January and February versus previous expectations.

In terms of the other releases, there were signs that the US economy continued to strengthen, with the Conference Board consumer confidence reading rising to 109.7 in March, well above the 90.4 reading in February and well beyond consensus forecasts of 96.9, surpassing even the most optimistic of forecasters. The manufacturing ISM (Institute for Supply Management) also rose beyond expectations in March to 64.7, its highest outturn in almost 39 years.

The Federal Reserve are likely to look on the raft of data and surveys and conclude that they need do no more in terms of stimulus, other than that already announced, but it could still be argued that an earlier taper, something the markets have been speculating about, would be prudent given the pace of recovery.

The other big news from last week was US President Joe Biden’s big announcement on his economic transformation plan. The plan, estimated to costs upwards of $2.25 trillion over 8 years will replace crumbling infrastructure, carbon based energy and support childcare for working parents. However, it did not receive a glowing reception from lawmakers in the House and Senate, with Republicans critical of the plans to raise corporate taxes, and moderate Democrats failing to show much support for it either.

The dollar held up well against the EUR and other majors, USD/JPY breaking through ¥110 on Tuesday of last week and holding above there over the next few sessions. Can the US dollar remain supported as the global economy continues to recover? Will the US be able to meet the ambitious target of 90% of the population being offered a first vaccine by the 17th April?

This week’s US data and surveys are unlikely to offer the dollar much support. Wednesday’s release of the FOMC’s (Federal Open Market Committee) March meeting minutes could provide additional insight into the debate at the Fed around tapering the money printing programme.

Europe: Euroland picks up some momentum on vaccine shots but France locks down for a month

The data on vaccines from last week was more optimistic as far as the EU are concerned, showing that momentum is beginning to pick up. There was also a story published on Bloomberg, quoting from an EU internal memo, suggesting that the most countries were expecting to reach herd immunity by the end of the summer. That would suggest that any economic lag will be measured in weeks or months, rather than quarters.

The news wasn’t all positive though, with the French government opting to lockdown the country for a month so that the spread of coronavirus can be brought back under control. Curfew measures have not been sufficient to do this, and President Macron wants to bring down the rate of reinfection faster, so that the vaccination programme has a better chance of further arresting the rate of infection, hospitalisation and death. The EU has been criticised by the World Health Organisation in terms of its rollout of vaccination, but it is again worth mentioning that the EU are expecting vaccine delivery to be significantly higher in Q2.

The limited data that was released last week reported strength in terms of manufacturing activity, but that was already broadly already known, and priced for by markets. This week also sees relatively little significant data or surveys released to offer more support to the EUR. The February industrial production data from Germany and a number of other countries is unlikely to alter the narrative as far as the pace of recovery is concerned. Indeed, the markets are already expecting a sharp increase in production from Germany, which will be the most watched of all industrial production figures released.

The European Central Bank’s next meeting is just over 2 weeks away, and they have only just increased the bond purchase programme. It looks unlikely that there will be any further moves in monetary policy this side of the end of H1, but the ECB (European Central Bank) might be scaling back the forecasts for economic growth the next time they publish these.

Central banks: Chile on hold, but hikes on the way; what did the RBA (Reserve Bank of Australia) do this week?

The central bank of Chile was the only significant interest rate meeting last week. As expected they left policy on hold, but there was a signal that rates would rise in the next few quarters, given an improved overall economic outlook. That was in spite of short term downside risks from rising infections and lockdowns, which were seen as transitory and the drag on the economy smaller than previous pandemic driven restrictions. This chimes with other Latin American central banks, who have recently indicated they see no further need for loosening.

This week, there are a number of meetings. The RBA have already announced their policy decision, which was expected to be unchanged, given actions taken as recently as last month.

On Wednesday of this week, the RBI (Reserve Bank of India) are set to leave policy unchanged, but given the bullish outlook for rebound in the economy, the RBI are likely finished with the loosening cycle, but are unlikely to tighten monetary policy for this year given the size of the drop in output in 2020. The National Bank of Poland’s monetary policy decision is also expected on Wednesday and again expected to be no change. The market expectation is for higher inflation risks, which would preclude any further loosening. Finally, the central bank of Peru announce on Thursday. There is nothing to suggest the need for tighter monetary conditions now or for the foreseeable future given a soft current economic situation.

To read the previous quick take, click here.
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