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

06 December 2021

Neil ParkerFX Markets Strategist

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Neil Parker, our FX Markets Strategist, shares his views on the currency markets this week

United Kingdom: Bank of England run for cover over 16 December Monetary Policy Committee meeting

Last week saw the GBP fall to fresh lows for the year against the USD. In part this was down to some comments from the Bank of England Monetary Policy Committee (MPC) members, and in part it was prompted by the US Federal Reserve Chair Jerome Powell’s comments on US monetary policy.

The MPC members testified to the Treasury Select Committee on Wednesday, and they tried to provide cover for either an on hold or interest rate hike decision at the upcoming 16 December meeting. Bank of England Chief Economist, Huw Pill, stressed that the groundwork had been done in terms of preparing markets for a rate rise, although was non-committal about the timing of any hike. Catherine Mann, an MPC external member, argued that it was premature to be discussing the timing of any rate increase, and that the new Covid variant put consumer confidence and spending at risk. It is clear that the Bank of England are waiting on more data releases, both economic and healthcare in nature, before deciding which way to go at the upcoming meeting. In fairness, that’s what they should do, even if the financial markets don’t like it.

In terms of data and surveys, last week saw manufacturing and services Purchasing Managers’ Indices for November (final reading), both of which were marginally revised lower from the preliminary readings. There was also the November Nationwide house price data released, and that showed a further increase in house prices, as the stock of housing remained at historically low levels. Overall though the data and surveys were of little consequence to financial markets, who were more interested in the US taper talk and UK monetary policy debate.

GBP/USD’s slide to $1.3195 last week, and the continued pressure on GBP/EUR, suggested that the markets are far less confident about either a rate increase from the Bank of England or the UK’s economic momentum heading into 2022. This week’s data and survey releases centre around Friday’s monthly Gross Domestic Product (GDP) figures for October. If these show a slowing in momentum, or even a surprise drop in output, that could deal a heavy blow to the case for a near-term UK rate rise and further damage GBP confidence, in my view.

United States: Fed’s Powell jacks up expectations of faster taper, just as payrolls undershoot

US Federal Reserve Chair, Jerome Powell, fresh from being nominated for a second term, chose a Senate Banking Committee appearance to manage market expectations about the pace that the asset purchase taper would proceed at, post the December Federal Open Market Committee meeting.

Powell’s comments were unequivocal, in that he stated it was appropriate to consider a faster taper (versus the $15bn a month reduction) as the risks of persistent inflation increased. Yet he used the word consider, which gives him some cover, but given that he repeated the phrase in another answer, the comment felt rehearsed and a clear warning of the Fed intentions.

Last week’s data didn’t play ball however, and in particular the US employment report for November. This recorded a material undershoot in net non-farm payrolls growth versus expectations, up just 210,000 on October –  the weakest growth in jobs since December 2020, when payrolls fell. There was a sharper than expected drop in the unemployment rate, to 4.2% from 4.6% in October, and labour force participation rose marginally. The weak jobs growth number could have been in part due to a lack of skilled labour to fill the available vacancies.

There is a potentially larger test coming in terms of US data. At the end of this week, November consumer price inflation figures are released. These could record a further jump in headline and core inflation rates to fresh multi-decade highs, which would likely increase the pressure for a faster tapering.

The USD has remained well supported, and the prospect of a faster tapering in the Fed’s asset purchase programme would, under normal circumstances, prompt additional USD gains. It is likely priced in though, so the markets may not gain as much as expected, if at all, even if the Consumer Price Index figures record additional inflation pressures. 

Euroland: Sees inflation rates rise as activity levels drop

Last week’s data and survey releases made the job of the European Central Bank no easier. The inflation data from France, Germany, Italy, Spain and Euroland for November recorded a further jump in headline and core consumer price inflation rates. The rise in the headline and core rates of Euroland inflation to 4.9% and 2.6% year-on-year respectively were record highs, driven by hikes in a broad base of prices.

However, the activity indices from the Chartered Institute of Purchasing and Supply recorded a slowing in manufacturing and services activity in November. The German government also announced that it intended to introduce more draconian measures to enforce vaccinations, or restrict the unvaccinated populations movements. That follows on from measures introduced in Austria to do the same, and the introduction of financial penalties for the unvaccinated across Italy. These measures of lockdowns and restrictions could undermine recent progress in terms of economic recovery, as well as undermine the case for a swifter end to emergency pandemic monetary policy measures, as some at the European Central Bank have begun to argue for. The Organisation for Economic Co-operation and Development also revised down its forecasts for 2022 GDP growth to 4.3% in the December economic outlook versus 4.6% in the September update.

This week sees German factory orders and industrial production figures for October, and the December Zentrum für Europäische Wirtschaftsforschung (Germany’s Sentiment Index) survey released, as well as industrial production figures from the Netherlands and Italy. There is the Euroland Sentix investor confidence survey for December released at the beginning of the week, and final Q3 GDP figures due on Tuesday. None of these releases are likely to offer much assistance or insight for financial markets, and the EUR is unlikely to creep away from its current low level against the USD. Could all of the work that has been done by authorities in supporting economies through the initial pandemic require redoing in part because of low vaccination levels and the new Omicron Covid variant?

Central banks: Turkish lira slide continues despite interventions; hikes to come across the world this week

The Turkish lira slide to fresh all-time lows this week against the USD, as the ramifications of political interference in the central bank continued to hit home. The latest revelation was the resignation of the government’s Finance Chief Lufti Elvan, who resigned in the wake of the rate cuts from the Turkish central bank, which he opposed. The central bank has spent much of the last week trying to shore up confidence in the lira, but a combination of low liquidity and low confidence propelled USD/TRY to an all-time high of 13.9519, a 46% depreciation in the lira in the space of just over a month. The risks are for further moves higher in USD/TRY over the course of the remainder of this year, with the next meeting of the Turkish central bank on 16 December an obvious focal point.

This week sees the central banks of Australia, India, Canada, Brazil, Poland and Peru all due to meet. We expect no change from the Reserve Bank of Australia, Reserve Bank of India or the Bank of Canada, with Covid variant risks likely to be mentioned so as to dampen expectations of tightening to come. As for the Brazilian central bank, the prospect is for a hike of 150 basis point, as seen at the previous meeting although the risk is for a larger tightening in Brazilian official rates. The National Bank of Poland are likely to raise rates 75 basis points, to 2% with inflation hitting a decade high. The week is likely to be rounded out with a 50 basis point rate increase from the central bank of Peru, again in reference to higher than anticipated inflation rates and pressures. Overall the dichotomy in central banks will grow between those who believe this is all transitory and those who worry this is the beginning of an era of higher inflation.  

View last week’s Quick Take.

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