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

07 September 2021

Neil ParkerFX Markets Strategist

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UNITED KINGDOM: Sterling gains amid positive sentiment, GDP eyed

Sterling traded higher against the USD and EUR last week as the positive market sentiment continued, after the soft US labour data reduced the possibility of an imminent announcement to reduce asset purchases by the Fed. UK survey data have generally signalled some further moderation or normalisation in the pace of growth, and the upside scope for Sterling against the EUR might be diminishing, given the solid Euro area data. Whether the end of the school holidays and the return to work have an impact on Covid developments, is an area to watch.

The highlight of this week’s UK economic data releases is GDP for July. With the phased re-opening of the domestic economy having begun in mid-April, most of the easy yards of recovery might have already been made, and Q2 GDP growth will likely remain at above-trend rates, but report a further moderation in July, in my view.

UNITED STATES: USD lower after a miss in employment

The USD continued to trade lower last week amid improving market sentiment after the Fed’s chair Powell failed to provide clear signals of an imminent announcement of reducing asset purchases in the Jackson Hole speech. The weaker-than-expected payroll data further reduced the possibility of a Fed September announcement to reduce asset purchases and weighed on the dollar, with Non-Farm Payrolls increasing 235,000 last month – much lower than economists’ expectations of 725,000 in a Bloomberg survey.

The September FOMC (Federal Open Market Committee) meeting might diminish as a major economic event as the soft employment data further reduced the possibility of an announcement to reduce asset purchases at the meeting. However, it’s not fully clear yet if the most recent jobs report is the start of a slowing in trend or simply seasonal issues. The next payroll report on 8 October now looms large, as the main event in considering the Fed’s timing of reducing asset purchases. This week will see the Fed’s Williams speak, which will likely provide further signals of the impact of the payroll data on their monetary policy outlook and plans to reduce asset purchases.

EUROPE: Europe on the rise, ECB in focus

EUR/USD traded higher above 1.1850 as the USD weakened last week. The EUR outlook appears to be improving, with Covid looking reasonably well controlled and economic data having been solid. The final revisions to August PMI (Purchasing Managers’ Index) data released last Friday remained at cyclical highs, adding evidence to the region’s resilient recovery.

The European Central Bank (ECB) will meet this week. The focus will be on any changes to the central bank’s asset purchases programme. Recent ECB speakers appear to have hinted at the possibility of changing the intensity of asset purchases. Forecast upgrades also seem likely given recent solid economic data, which could lend support to the EUR, in my view. This week will also see the details of Q2 GDP growth, which might further confirm the region’s solid rebound in activities.

CENTRAL BANKS: A handful of meetings this week

The Central Bank of Chile (BCCh) surprised the markets by hiking policy rates by 0.75% last Tuesday, more than economists’ expectations of either 0.25% or 0.5% rate hike in a Bloomberg survey. The rapid economic recovery, elevated July inflation and the risk of further stimulus from pension withdrawals, convinced the board of the need to tighten their monetary policy faster.

This week will see a handful of central bank meetings. The European Central Bank (ECB) policy meeting could be the highlight this Thursday, and the focus will be on any possible changes on their asset purchase programmes as discussed above. The Reserve Bank of Australia (RBA) will meet on Tuesday and whether they will reduce their asset purchases as planned is an area to watch given recent lockdowns. The Bank of Canada (BoC), National Bank of Poland (NBP) and the Central Bank of Malaysia (BNM) will likely keep their policy settings unchanged this week. The Central Reserve Bank of Peru (BCRP) and Central Bank of Russia (CBR) will both likely hike rates amid inflationary pressures on Friday.

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