What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
United Kingdom: GBP up as negative interest rates get put on ice
Last week’s news on the economy was better than expected. The final January PMIs (Purchasing Managers’ Index) for manufacturing and services rose against the preliminary readings. The news on the construction sector was less optimistic, as its PMI dropped to 49.2 in January from 54.6 in December, its lowest reading since May 2020. Other notable releases saw the Bank of England’s (BoE) lending to individuals data for December record ongoing strength in lending on dwellings, but a continued repayment of unsecured lending. Then there was the January Nationwide house price index. This recorded the first fall in house prices in 7 months, was this a portent of things to come?
That really didn’t make much difference to market sentiment though, with other areas of greater interest, particularly the BoE February Monetary Policy Committee meeting, press conference and the quarterly Monetary Policy Report. The upshot was that the BoE was continuing the technical work on negative interest rates, in case they become necessary, but it was clear from the Bank’s commentary in the press conference that deployment of sub-zero interest rates wasn’t under current consideration. The BoE’s projections for growth and inflation indicated a quick rebound to pre COVID levels of economic activity, but a significant persistent undershoot of the inflation target until towards the end of the 2-year forecast horizon.
GBP rallied against the EUR over the course of last week. It was helped by the further reduction in negative interest rate risks after the BoE’s meeting, and by the continued upscaling of the vaccination programme. Based on data for the first six days of vaccinations in February, the UK was set to deliver around 3m vaccine shots versus the previous week, and around 12.5m would have been vaccinated by the 7th February. GBP finished last week above €1.14, so what does this week hold?
Data is thin on the ground until Friday, when the provisional Q4 GDP (Gross Domestic Product) figures are released. These are expected to report a modest expansion in GDP in Q4, which would be quite an achievement, given the November lockdown and tightening of restrictions in December. Growth though is likely to be driven by additional government support to the economy, rather than greater investment or consumer spending. The data is likely to be treated as old news as well, with markets instead focused on whether the UK is on track to lift lockdown measures on the 8th March (earlier in Wales & Scotland). For the GBP, support is likely to continue against other majors provided the UK can maintain and increase the pace of vaccinations rollout.
United States: US payrolls disappoint; Democrats push ahead with stimulus plan
The focus for last week was on the January non-farm payrolls data released on Friday. However, ahead of that data release, we had surveys and other data that painted a more positive than anticipated picture of the US economy. December construction spending was stronger than forecast, as were January manufacturing and services PMI readings. The ISM (Institute for Supply Management) indices were a mixed bag, but crucially the services index rose, despite the tighter restrictions in place across many US states.
There was also positive news from new vehicle sales, which beat consensus forecasts. All of these though were the appetisers ahead of the January payroll release. This recorded a much smaller than expected increase in net payrolls of 49,000, and the two month revision to payrolls data, covering November and December, reported a 227,000 reduction in net payrolls versus previous outturns. There was a surprisingly large fall in the unemployment rate, but that was due to individuals leaving the calculation.
The USD held up well against other majors in the past week, but didn’t hold onto gains made in the early stages. Towards the end of the week, we saw both the EUR and GBP recoup losses made in previous sessions, though the EUR still looked under greater pressure than the GBP. On the political front, President Joe Biden continued to press ahead with efforts to pass his $1.9 trillion stimulus programme, which got a boost after some resolutions proposed by the Senate were adopted by the House. It now looks likely that the fiscal spending will pass the Senate with only Democrat support and Vice President Harris’s tie breaking vote.
This week’s key releases are the January consumer price inflation and monthly Budget statement figures, both on Wednesday. Inflation is first up, and expected to report a small increase in the headline rate, from 1.4% to 1.5%. As for the fiscal data, a sharp increase in the deficit is expected, after additional fiscal loosening was sanctioned, and following the tightening of COVID restrictions. There are questions that remain to be answered over the pace of the US’s recovery, which could undermine the USD, especially if other economies make a better job of accelerating the programme of COVID vaccinations.
Europe: lockdowns extended?
Last week was mixed in terms of the newsflow. The good news on inflation continued, with the Euroland aggregate reading rising from -0.3% year on year to +0.9%. That was well above the 0.6% consensus forecast. Interestingly, the markets did not react much to this news, not the final January PMI releases. The manufacturing PMI index recorded a very slight improvement from the provisional figures to 54.8 from 54.7, and the services reading was also improved, at 45.4 from 45.0. All indications are that the Euroland economy has reacted better to the second major lockdown, with more of the economy remaining open than in the first.
The prospect of lockdowns in Europe being extended will have been elevated by the news that the German government was considering just such a move. Even with the rates of infection falling, fears regarding the spread of new variants of COVID are sufficient to prompt caution amongst governments, especially with Europe’s vaccination programme rollout far less advanced than in other countries/economies. Will other countries follow suit? It seems likely that they will, at least until more of the vulnerable population of Europe has received its first dose of vaccine, which may not be until into the spring.
The EUR struggled last week against the USD. It could have been due to a combination of factors, with the most likely candidates being the COVID developments and ongoing concerns over risk appetite in markets. The EUR did make some limited gains at the end of the week, but that was prompted by a risk appetite recovery and disappointing US data.
This week’s data and survey releases are of little significance to markets. They may show some countries’ industrial activity improving marginally in December. Overall, the pressure on the EUR is likely to remain, even as risk appetite improves somewhat.
Central banks: No change to interest rates last week; Mexico to cut this week?
Last week saw the central banks of Australia, Thailand, Iceland, Poland, the Czech Republic and India announce their policy decisions. The Reserve Bank of Australia announced that it would expand the bond buying programme by a further A$100bn, which was slightly earlier than when such an expansion announcement was expected. After further localised outbreaks of COVID, which has led to regional lockdowns, the prospect of a slower return to pre-pandemic output levels may well be responsible for the quicker increase in asset purchases. Also last week the Reserve Bank of India left interest rates on hold, as expected, but leave room to add more liquidity if required. The interest in India will be on this week’s Budget, and how much additional stimulus will be provided. None of the other central banks were likely to loosen monetary policy, and they did not surprise markets.
This week sees the Swedish Riksbank, and central banks of Mexico, Peru and Russia all meet. The Riksbank is not expected to alter its monetary policy stance, but it may speed up its asset purchases, given the prospects for week growth in H1 2021. The big meeting of the week is likely to be central bank of Mexico. Consensus expectations are for a 25 basis point rate cut, which would leave the overnight rate at 4%, its lowest level since 2016. The central banks of Peru and Russia aren’t expected to loosen, though the latter has room for manoeuvre if it wants to. Globally, it’s still whether central banks will loosen further, rather than when they might consider tightening.
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