FX outlook: Parky’s quick take – 2 September 2020

02 September 2020

Neil ParkerFX Markets Strategist

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

United Kingdom

GBP remains strong, as data shows momentum

Last week saw GBP/USD hit its highest level since 16th December 2019. This was less a GBP move than it was a USD sell off, with the GBP making more limited headway higher against the EUR and other majors. GBP/EUR did climb back above €1.12 at the end of last week, for the first time since mid-June. There has been some optimism regarding the UK’s recovery, thanks to better August PMI (Purchasing Managers’ Index) figures and a sharp improvement in July retail sales, after June’s jump, but there are some dark clouds still hanging over the pound in terms of the stalled UK/EU trade.

Last week also saw Bank of England Governor, Andrew Bailey, deliver a virtual speech at the Fed’s Jackson Hole Symposium. The Governor reiterated that negative rates were a tool that the central bank still had at their disposal, if necessary, but also hinted at more headroom for asset purchases and potentially a wider pool for them to pick from. The Governor’s comments were guarded, in that he did not suggest that the BoE (Bank of England) would be adjusting policy anytime soon, and the Monetary Policy Committee will want to see how the recovery is progressing before making any judgements on the need for further policy accommodation.

EU and UK negotiators Barnier and Frost are set for a face to face meeting this week (if conditions allow), as the talks enter the final phase before the official deadline of 2nd October. Barnier though has suggested that a deal would have to be agreed before the end of October, suggesting the deadline has some flexibility. If there were to be some breakthrough in discussions, that could help the GBP push higher still, but what are the risks to sterling of further deadlock?

A light data calendar this week will have some interesting releases, particularly Nationwide house price data for August and the final August PMI figures for manufacturing and services. Will the house price data record a jump in prices, and will the PMIs indicate a further improvement in activity from the preliminary figures? Is the pound set to test even higher, or might the rally against the USD stall after the near 3 cent improvement seen last week?   

Europe

Infections rising, but then again so is the EUR 

One worrying trend in recent weeks has been the increase in new coronavirus infections across a number of key countries such as Germany, France, Spain, and Holland. Last Friday, France recorded the highest number of new infections since the peak way back at the end of March. There have been some signs of a levelling off in other countries, such as Spain and Germany, and as yet we have not seen a significant increase in hospitalisations or deaths, according to the official statistics, where available. The context for many countries is that testing capabilities have been increased since the beginning of the crisis, such that these spikes in case numbers are not necessarily comparable with then, but they could still prompt further restrictions being introduced and therefore undermine recoveries that have only just begun.

There has been some positive news in terms of the data, although it is not universally positive, and trends in confidence and activity surveys are pointing in the right direction. Last week’s improvement in the German IFO (Information and Forschung / Germany’s Institute for Economic Research) survey for August, and Euroland confidence indicators for the economy, industry, and services came despite the rise in COVID case numbers.

This week, the emphasis switches to PMI figures for manufacturing and services, which disappointed in the preliminary estimates. Prior to their release we had German August consumer prices data, the August German unemployment data, and following the manufacturing PMI, Euroland unemployment and consumer prices for August as well.

The EUR ended last week higher against the USD, and with the US suffering a mix of economic, political and social malaise, a further appreciation this week should not be ruled out, despite Euroland’s own challenges.     

United States

USD still under pressure as the employment report remains the focus

The Fed’s Jackson Hole Symposium had Federal Reserve Chairman, Jerome Powell, as the keynote speaker. He delivered a sober assessment of economic conditions, noting persistently (too) low inflation. This led to a significant change in monetary policy setting, with Powell indicating the Fed would move to an average inflation target, meaning that if inflation undershot its target for a sustained period, the Fed would allow it to overshoot before tightening monetary policy. This shift in the monetary policy dynamic will allow central banks to leave monetary policy on hold for far longer into any upswing, and was greeted positively by equity markets.

Last week’s US data and surveys pointed to some stalling in the improvement in activity, with the exception of the housing market, where pending home sales hit a 15-year high, and personal spending, which jumped by almost 2% in July after a 6%+ increase in June.

This week is likely to prove an additional challenge to the USD. Trump’s retweet of a John Ratcliffe tweet on Monday, regarding China, didn’t do the USD any favours. Meanwhile, the Federal Reserve’s signal of potentially looser monetary policy for longer, could make the payrolls data, due on Friday, irrelevant for the USD.

Payrolls are expected to record another sizeable increase in net employment, with consensus close to 1.5m jobs added back. Will this prompt any turnaround for the USD, or will the negativity persist in spite of, or even because of, the economic data? When will markets start to pay more attention to the Presidential election and less to the economy?     

Rest of the world

More rates cuts? Highly likely for some territories

The change in emphasis with regards to major central bank policy and key indicators may, at the margin, influence policymaking in emerging markets, but realistically, with interest rates at multi decade lows across most of the globe, there is not much further to go for most central banks in terms of conventional policy moves.

This week has already seen the Central Bank of Colombia cut interest rates, from 2.25% to 2.00%, the Dominican Republic central bank cut to 3% from 3.5%, and the RBA (Reserve Bank of Australia) leave monetary policy unchanged. The RBA was under no pressure to reduce interest rates in terms of the current economic data and the fact that interest rates were at record lows. However, a recent return of some lockdown conditions after a spike in new COVID infections could require additional monetary support from the RBA or fiscal support from the Australian government in the months to come. Could the RBA break out alternative monetary measures if they deem that interest rates are as low as they want them to go?

The remainder of the week only has Chilean central bank meeting, and with interest rates at 0.5% there is not likely to be any further cuts from them. That is despite a 13.2% quarter on quarter contraction in GDP (Gross Domestic Product), according to the Banco Central de Chile, which unsurprisingly was the worst on record. A further cut in interest rates is not completely out of the question, even with interest rates at the lower bound, if inflation rates head lower from here.

To read the previous quick take, click here

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