What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Last week’s bank holiday shortened trading was interspersed with some interesting data releases. May Nationwide house price data recorded a much sharper than expected rise, with prices rising by 1.8% month on month, after a 2.3% rise in April. On a year on year basis, house prices were up 10.9%, the highest level of annual house price inflation in the reading since August 2014. The final May manufacturing PMI index fell back slightly from its initial reading above 66, and meanwhile lending secured on dwellings dropped back sharply in April, to just $3.3bn, after a glut of lending in March. The other PMIs were more upbeat. On Thursday the services PMI rose to a fresh 24-year high in the final May reading, whilst on Friday the May construction PMI rose to 64.2, from 61.6 in April. Within the construction PMI index there was an additional titbit of information, in that the housing activity index rose to 66.3 in May from 61.2, making it the highest reading since August 2014, which coincided with the Nationwide figures.
The news on COVID however has been less positive. Firstly, the case numbers rose throughout last week, prompted by the spread of the variant first discovered in India, which appears to be more transmissible than previous variants. The second piece of news was a hammer blow to the travel industry, with the government removing Portugal from the Green list of countries, and adding no new destinations onto that list, despite sharp declines in case numbers in a number of popular European destinations.
It was perhaps no surprise that the pound struggled to hold onto its gains against the EUR or USD, given that the political/medical news acted as a counterbalance to generally more positive UK data and survey releases.
This week the data releases are heavily weighted towards the end, with April monthly GDP, index of services, industrial production, construction output and trade balance figures. The monthly GDP data is expected to be of greatest interest, and should record another sharp upturn in activity, after the bounce in March. Could the rebound be even sharper? Given that retail sales jumped by more than double consensus forecasts, the risks on services growth and overall GDP are likely to be to the upside.
The GBP will likely test higher against the US dollar this week again. However, it needs to make sustained progress through the $1.42 region, something it has failed to do repeatedly. Additional failures could spell the end of the latest vein of GBP strength, with market attention turning towards the lower end of recent ranges if GBP fails again. If it does sustain a push through $1.42, then moves up towards the high $1.43s and low $1.44s will be the next target for GBP/USD.
United States: US payrolls disappoint; consumer prices to spike further?
Last week’s big release was the May non-farm payrolls data. The consensus for the release was a net gain of 675,000 on April, but the reading came in at 559,000. The unemployment rate dropped back to 5.8%, but so did the labour force participation rate, to 61.6% from 61.7%. Average earnings growth was marginally stronger than expectations, at 2% year on year, but that is a pace unfavourable with prevailing consumer price inflation rates.
There are not many who expect a short term change of mind from the Federal Reserve, at least in terms of the current monetary stance, but US Treasury Secretary, Janet Yellen, spoke of the possibility that higher interest rates would be necessary. In an interview with Bloomberg News the former central bank Chair suggested that higher interest rates might even be optimal for the US economy and households. I’m not so sure businesses or the 7.5m still out of work would view it with the same enthusiasm!
Last week’s Fed Beige Book suggested that the growth pick up continued, but that supply shortages were at least in part responsible for some of the hikes in prices observed recently. As such that is one ‘flashing amber’ warning light for the Fed, with the next meeting due on 16th June.
This week sees the May consumer price inflation figures released on Thursday. These are expected to record headline inflation at its highest level since 2008, and core inflation at its highest level since 1993. The Federal Reserve, much like the European Central Bank, view inflation as predominantly transitory, and as such will not be that alarmed by the rise in prices that has been seen. However, if growth persists, there may be a more difficult conversation to be had as 2021 comes towards a close.
The US dollar continues to struggle, and whilst the news from the US is positive, the fact that important data releases continue to miss versus expectations may remain a cause of concern for the dollar over the course of this week.
Europe: European Central Bank meeting to leave asset purchases elevated?
Confidence data over the course of last week was generally better than expected. That culminated in the release of Euroland confidence indicators for May on Friday, which reported economic confidence at its highest level since January 2018. That positive news was somewhat tainted by the revised Q1 French GDP figure, which recorded an unexpected drop in output of 0.1% quarter on quarter, having originally recorded a 0.4% expansion, whilst April consumer spending dropped 8.4% month on month, against consensus expectations of only a 4% drop.
An article published by Bloomberg suggests that the European Central Bank, who meet on 10th June, are now expected to leave in place its faster pace of bond buying, according to a number of banks. However, there has been speculation in financial markets that there is less of a need for such ongoing intervention, which has in part been responsible for the improvement in the EUR’s value.
This week’s data and surveys could lend additional weight to the argument of a pullback in asset purchase amounts. Already released have been the provisional May consumer price inflation figures from Italy and Germany. These recorded 0.3% for Germany (0.3% as expected) and 0.0% for Italy (0.1% expected). German unemployment, which rose by 9,000 in April declined by 15,000 in May, indicating that the German labour market strengthened. We’ve also seen the final May manufacturing PMI for Euroland, which came out at 63.1 versus the initial outturn of 62.8. For the remainder of the week, the focus will be on Thursday’s services PMI reading. Can Euroland record some closing of the activity gap between itself and other major economies? The PMIs could provide the strongest argument against extending the faster pace of asset purchases.
The euro continues to try higher against the US dollar, but is there really more upside to come, or will FX markets be more rangebound as they wait for a decisive break in the fundamentals?
Central banks: All on hold last week; risks of tightening this week
Last week’s central bank meetings included the Bank of Israel, Reserve Bank of Australia and the Reserve Bank of India. All left interest rates on hold, but that wasn’t the end of the matter. The Bank of Israel reconfirmed their commitment to keeping interest rates lower for longer, but will have one eye on what’s happening with the Federal Reserve. One helpful element remains the strength of the shekel, which continues to trade close to multi decade highs, despite significant FX intervention.
The Reserve Bank of Australia noted that the recovery had been faster than expected, which I imagine could reduce its appetite to roll over its yield target bond to the November 2024 maturity, when its up for review in July. Finally, the Reserve Bank of India boosted its quantitative easing programme, indicating that they felt reducing interest rates further was not an option. India has recently suffered a devastating renewed wave of COVID infections, and the moves to strengthen alternative monetary policy measures were in response to the extra fiscal support provided by the government.
This week, there are several interesting meeting outcomes for markets to digest. The central bank of Chile’s meeting on Tuesday could see board remove some of the accommodative language after the rise in inflation seen regionally and the recovery in unemployment. The Bank of Canada meet on Wednesday and may have to be more mindful of the strength of the Canadian dollar. The accompanying statement could therefore prove a testing ground for the FX markets, where participants have remained happy to be long in the CAD until now.
On Friday, the Central Bank of Russia meet and are expected to hike by 25 basis points. This move has been relatively well flagged. It is unlikely that the Central Bank of Russia will surprise the markets, but if it does, it would be because it raises by more than markets expect, rather than because it keeps rates on hold.
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