What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Running out of road – Brexit deal hurtles towards a conclusion
The negotiations between the UK and EU continued to rumble on last week. There were more positive comments about the proximity of a deal, but none emerged, with talks abruptly ending on Thursday, after the UK accused the EU of bringing new elements to the negotiation at the 11th hour. However, talks then resumed on Friday, despite French threats to veto any deal reported in the UK media. Interestingly, the pound ignored those last minute glitch in negotiations, and rallied against USD and EUR into the end of the week, as optimism persists that a deal between the two sides will be secured. However, the weekend negotiations did not go well, EU Chief Negotiator denied earlier reports, that a deal on fishing was close, and the UK Prime Minister, Boris Johnson, renewed his threat to walk away from talks. There was good news as the Pfizer/BioNTech vaccine was approved by the UK Medicines and Healthcare products Regulatory Agency (MHRA) for immediate use, and started to be rolled out across the most vulnerable in UK society.
In terms of the data and surveys, these recorded a further drop in unsecured borrowing in October, as the UK headed into lockdown, whilst lending secured on dwellings rose by a net £4.3bn, less than the September reading of £4.9bn, but mortgage approvals jumped to 97,500, the highest number since September 2007. Final November PMIs (Purchasing Managers’ Index) from manufacturing and services reported a rise in the indices versus the preliminary readings, and the November construction PMI index rose against the October reading. The strength of the housing market was further demonstrated by the Nationwide house price figures for November, which reported prices up 6.5% year on year to a new record high, and the annual pace of house price growth was the fastest it has been since the beginning of 2015.
The week ahead is likely to see plenty of interest in the UK GDP (Gross Domestic Product) figures for October, released on Thursday, along with October index of services and industrial production figures. Will there have been any growth in GDP in the run up to the lockdown in England and covering tighter restrictions across the four counties of the United Kingdom? Prior to these releases is the RICS (Royal Institution of Chartered Surveyors) house price balance survey for November. Knowing what we know from the Nationwide figures, the RICS survey should report ongoing strength in the housing market, but not another improvement on the October figure. Will these figures support any additional GBP gains? Not on their own, but if a Brexit deal is secured, then there may be some additional upside for the pound.
All eyes on the European Central Bank (ECB) as the EUR rise persists
In Euroland last week, there were further signals that parts of the economy heading into the lockdowns and restrictions were performing better, but also disappointing signals that the issues of deflation remain difficult to solve. The Euroland economy seems to be unique as a Western developed economy, in terms of deflation issues, but will that restrain it in terms of growth in 2021, after a disastrous 2020? Last week saw additional signals from the labour markets that the Euroland economy has thus far weathered the last coronavirus storm relatively well, although the proof will be in Q4 GDP figures, which aren’t due for release until the early part of February.
Already this week we’ve had the German industrial production figures for October, and the Euroland Sentix investor confidence index for December. Both releases were better than expected, adding to indications that the Euroland economy is standing up to the 2nd coronavirus wave better than it did the first.
All eyes for this week are set to be centred on the ECB Governing Council meeting. There won’t be any change in the official interest rates, which are set to remain at zero (refinancing rate), but there are likely to be adjustments in the Pandemic Emergency Purchase Programme (PEPP) and the Targeted Longer-Term Refinancing Operations (TLTROs). These could provide additional room for ultra-cheap borrowing for governments and banks, to further assist the recovery in economies worst affected by COVID. How much more will be sanctioned, and how quickly will the ECB unlock the funding going into year-end and the beginning of 2021? Will this have much effect on the EUR? Perhaps, with the EUR having made healthy gains against the USD and GBP lately, and previous warnings from ECB members, including Chief Economist Lane, that the EUR’s strength could undermine the efforts to raise the inflation rate. Ahead of the ECB meeting, Tuesday sees the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey for December released, which is the only major release due. That is unlikely to prove market moving though, with attention diverted elsewhere.
Disappointing Payrolls could energise the Fed
Last week saw the Fed Beige Book, its assessment of current economic conditions, released, which indicated that, whilst growth was still assessed as modest or moderate, there were signs of slowing, as the latest spike in coronavirus infections swept across many US states. That news was complimented by data and survey releases prior to, and after, the Beige Book’s release, which reported manufacturing and services activity down in November. The big release of the week was the US employment report for November. Non-farm payrolls increased by a net 245k, only just over half the 460k market consensus forecast. The unemployment rate remained at 6.7%, but labour force participation dropped from 61.7% to 61.5%. A generally disappointing set of labour market figures that may galvanise opinions at the Federal Reserve that more needs to be done to re-energise the recovery. That is of increasing importance given the limited traction in fiscal stimulus talks between the Democrats and Republicans. The latest cross party fiscal relief plan in the Senate still stood at just $908bn, well short of the close to $2 trillion that the House Democrats had proposed, but is $400bn larger than the plan proposed by Senate Majority Leader Mitch McConnell had put forward. That package would prevent a government shutdown, which could come as early as the end of this week, with the government signing off on an aid package. Will there be more stimulus to come? Perhaps, although it may all depend upon the Senate runoff races due to be held in Georgia in January.
For the week ahead, consumer price inflation figures for November, along with the November government borrowing figures are the focus for markets. Headline inflation is expected lower at 1.1% year on year versus 1.2$ in October, according to market consensus, whilst core, ex food and energy, CPI (Consumer Price Index) inflation is seen holding at 1.6%. The budget deficit in November is expected to have been lower than in October, and lower than last year, although overall net government borrowing is set to remain elevated throughout the remainder of 2020 and 2021. The USD remains under considerable pressure against the other majors, falling to multi year lows against the likes of the EUR, GBP, CHF and CAD in the last week. The releases this week won’t prove helpful, and it is difficult to see what would lift the current market malaise with the USD.
Rest of the world
Staying steady ahead?
Last week saw no changes in monetary policy from the Israeli, Australian, Polish and Indian central banks, as expected. It would have been a surprise for any of them to cut interest rates further given the recent changes they have made, as well as taking into account economic improvements for some in recent months. That said, there is still scope for additional monetary loosening in the coming months if there are any setbacks to recoveries, issues with the rollout of mass vaccination programmes or if any additional deflationary pressures become evident.
This week, the central banks of Chile, Canada, Brazil, and Peru are all set to deliver their final monetary policy decisions of the year, and again none are expected to either alter key interest rates, or offer alternative monetary loosening measures. With the exception of Brazil, all the central banks have their interest rates very close to zero, so there is very limited scope for additional conventional loosening. As seen last week, these central banks are likely to adopt a watching brief, monitoring the US Federal Reserve meeting next week and inflation data, which remains subdued globally.
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