FX outlook: Parky’s quick take – 8 March 2021

08 March 2021

Neil ParkerFX Markets Strategist

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What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

United Kingdom: UK’s vaccine rollout slows; Budget makes little market impression

The UK’s rollout of vaccinations has now reached levels such that anybody 56 or over can now book a vaccination. That despite the fact that the number of first vaccinations was lower last week than in previous weeks, according to the government’s own figures. Some of this might be explained by the rise in the numbers of second doses administered. Perhaps it is also a demonstration that the early success of the vaccine programme, to vaccinate the vulnerable is no longer being maintained, because those in the lower age categories feel less at risk, or it could be short term supply issues.

The big news of last week was the Budget. The Chancellor, Rishi Sunak, billed it as a Budget for recovery, after the previous year was fiscal action to prevent the pandemic prompt mass layoffs, business failures and the NHS becoming overwhelmed. The fiscal support for key parts of the economy will remain in place for now, but will be wound down over the course of the year, as the economy unlocks. There were some surprises in the Budget, such as a super deduction on corporate profits if businesses invest more, and the Chancellor chose to freeze duties on all alcohol and fuel. There were also some strong final February PMIs (Purchasing Managers’ Index) released for manufacturing and construction, and only a slight pull back in the services PMI.

The GBP slipped against the USD, as risk appetite took a bit of hit, with yields rising as markets feared that central bankers might not be able to resist reducing levels of monetary support faster, if the recovery in the global economy managed to outpace expectations. It dropped back below $1.40 in the second half of last week and is now below $1.39. Will the recent trends persist this week?

With monthly GDP (Gross Domestic Product), industrial production and index of services data for January released on Friday, and the focus being on how bad things were in January, there has to be the risk that the pound continues to slide. Even if the numbers are better than market consensus, which is currently for an almost 5% month on month decline, it is difficult to see a big improvement in the GBP/USD rate. GBP/EUR on the other hand is making another push toward previous highs just above €1.17. With Euroland still trying to make significant progress in its vaccine programme, GBP/EUR may be where the pound finds it easiest to make gains.

United States: US gets some relief?

The past week culminated in the release of US non-farm payrolls data for February. The reading comfortably outperformed consensus expectations, with net payrolls rising by 379,000, and the unemployment rate dropping to 6.2%, a new post pandemic low. The participation rate held steady at 61.4%, still a full two percentage points below the pre-pandemic levels. There has been a general improvement in the economic data and surveys from the US lately, and that should please the Federal Reserve, who had fretted that a new round of restrictions could blow the economic recovery off course.

The Federal Reserve will also be pleased to see that the Biden stimulus/relief bill is closer to being passed into law, after the Senate, following a few amendments, passed it 50-49. The House of Representatives will review those changes in a final vote on Tuesday, and it should be signed into law by Joe Biden swiftly, provided there are no hiccups.

The Fed’s Beige Book, ahead of their meeting next week, reported a general improvement in the US economy, and the Federal Reserve Chair, Jerome Powell, reiterated that the objectives of full employment and inflation averaging 2% were still a long way away in comments towards the end of the week. That wasn’t enough to stop US yields rising further, and it won’t have been helped by the rise in oil prices seen at the beginning of this week.

The USD has rallied over the past week against most majors, helped by the rise in yields and the unrest in risk appetite, displayed by equity market volatility. This week sees February consumer prices data and the preliminary March University of Michigan consumer sentiment survey released. The Consumer Price Index (CPI) figures are expected to show headline inflation rising to 1.7% from 1.4% year on year, but the core rate is predicted to remain steady at 1.4%. Consumer sentiment may well have increased somewhat, but a lot of the recent increases are driven by fiscal relief measures helping the hardest hit.

Can the USD rally persist? It has made some large gains relatively quickly. It would not be unreasonable to think that there may be some temporary support for other majors, but that is all it is likely to be, without some material improvements in the global economy that aren’t already expected.

Europe: Euroland’s data improves, but their vaccine Public Relations takes another hit

The European Union saw a number of countries making U-turns towards the efficacy of the AZ (AstraZeneca) vaccine for the over 65s. Both France and Germany have been forced into embarrassing climb downs over previous statements made by the French President and German Chancellor. This however continues to take its toll in terms of the numbers vaccinated, with the European Union still having vaccinated fewer than one in ten of their population in total, and larger scale rejection of the AZ vaccine versus alternatives. Compare that with the UK, who have given over one third of their population a first vaccination, and are increasing the pace of providing the second vaccination dose.

There was a further hit to the European Union’s Public Relations over its vaccine programme in the form of yet another dispute with AstraZeneca. This time, Italy applied European Union powers to block AZ’s export of 250k doses of its vaccine to Australia, from its Italian production facility. This is despite Italy having one of the largest stockpiles of the AZ vaccine (1.5m doses), and one of the lowest uptakes from the European Union (only Malta is lower regarding this vaccine). The first application of the emergency powers that the European Union, via the European Commission, put in place has no doubt further harmed the EU’s reputation for competence on this issue. Despite a lack of vaccinations, German Chancellor, Angela Merkel, announced another extension of lockdown, but eased restrictions for the German economy, as the population exhibited fatigue, and there was the threat of rebellion amongst individual federal states.   

Meanwhile, the surveys and data last week showed signs of improvement, but will the slow progress on vaccine rollout significantly delay the recovery in 2021?

This week has already gotten off to a rocky start, with the German industrial production figures for January recording a sharp contraction, contradicting the rise in factory orders seen at the end of last week. However, the March Sentix investor confidence reading for Euroland rose much more than forecast, to its highest reading since February 2020, prior to the pandemic hitting most of mainland Europe. For the remainder of the week, there are more January industrial production data from various countries and Euroland, but the main event will be the ECB (European Central Bank) Governing Council meeting and press conference on Thursday. What will President Christine Lagarde and the ECB have to say about the recent increases in yields? Given that the pace of bond purchases last week were broadly the same as the week prior to that, it would appear the ECB are not that concerned currently.

The EUR slipped again against the USD and also GBP last week. It is unlikely to get much support from the data or events this week, and the ECB run the risk of not taking the recent rise in yields seriously enough, which could act as a further speed bump to the Euroland economic recovery.  

Central banks: Reserve Bank of Australia worried by yield increases; Will Bank of China worry as much?

Last week's central bank meetings reported no change from the Bank of Israel, central bank of Hungary, Reserve Bank of New Zealand or South Korean central bank. That wasn't a surprise, although with the Israeli economy rapidly unlocking, there is an intensifying risk that the Israeli central bank will be one of the first to start to correct ultra-loose monetary policy, unless there is an unjustified strengthening in the shekel, relative to other countries.

This week we expect no change in interest rates from the RBA (Reserve Bank of Australia), The National Bank of Poland or the central bank of Malaysia. There could be commentary from the RBA around the rise in yields, seen globally, as well as ongoing concern regarding the strength of the Aussie dollar. Overall though we should expect few surprises from this week's crop of central bank meetings.

 

To read the previous quick take, click here

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