3 minute read
What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Pound sinks under the weight of poor data
Last week we had monthly GDP (Gross Domestic Product) figures for May, consumer price inflation for June and labour market data for May/June. The figures were, in general, pretty awful, with GDP rising only 1.8% month on month in May, versus expectations of a 5.5% increase. The culprit was services activity, which returned only 0.9% month on month growth, when the sector had been expected to expand by almost 5%.
Inflation reported a surprise rebound, as computer games and clothing and footwear prices surprised to the topside. There was even some positive news from the labour market, with the claimant count falling by 28k in June, but given that it rose by almost 1.6m in between March and May this was small beer. The pound though dropped briefly below €1.10 and $1.25, and was struggling to recover its losses into the end of the week.
This week has three important UK releases due. June public finances data are released on Tuesday, and June retail sales figures are released on Friday. Public finances saw net borrowing of over £55bn in May, so will the June figure look similar, better or worse? As for retail sales, with all non-essential shops having re-opened, will consumers have quickly returned to store, or will activity disappoint robust expectations?
The most important release is likely to be the provisional July CIPS PMI (Chartered Institute of Purchasing and Supply Purchasing Managers’ Index) figures for manufacturing and services due at the end of the week. These are expected to report both sectors back in expansion territory, but how significant will the expansion be and will it last? There are also CBI (Confederation of British Industry) surveys for industry and the distributive trades and the preliminary July GfK (Growth from Knowledge) consumer confidence survey. These may provide some signs of further improvement, but it is doubtful any of this week’s releases will prompt any lasting strength for the GBP.
EUR rallies after grants agreed, will this be a sign of recovery?
Last week saw the ECB (European Central Bank) meet and it chose to stand put and wait for more information. That was hardly surprising given recent past actions and signs that parts of the Euroland economy were returning to normal. However, the ECB, whilst striking a tone of cautious optimism, saw that it has now moved from firefighting phase, to a recovery phase, and indicated that further support would be forthcoming, if necessary.
The figures from Euroland have been interesting lately, with the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey last week again recording lacklustre current conditions and some worsening in expectations. Over the weekend, there seems to have been some progress as far as the EU Recovery Plan is concerned, with seemingly an agreement near.
The scale of the grants has been scaled back from the original plan (€390bn versus €500bn), according to reports on Bloomberg. The news on this possible agreement has been received positively by FX (Foreign Exchange) markets, with the EUR rallying once again.
This week’s flash estimates of July manufacturing and services PMIs (Purchasing Managers’ Index) for France, Germany and the Euroland composite will probably prove to be of the greatest interest to FX markets. There is also the release of the German July IFO (Information and Forschung / Germany’s Institute for Economic Research) survey due at the end of the week. Will Germany continue to lag behind, or will manufacturing and services in Euroland’s largest economy finally have gained some momentum?
The EUR broke above $1.14 last week, but didn’t hold above that level for long. Can this week see the EUR sustain any rallies beyond $1.14, which it is back above now, and signal improving confidence in the Euroland recovery?
USD weakens over talks of more intervention
In the US, the Federal Reserve’s Beige Book reported that there were downside risks to the US economy, and as a consequence the risks are that the Federal Reserve will have to increase the amount of monetary intervention over the coming meetings, although perhaps not the one due next week. There is also talk about additional fiscal stimulus, with the President and Majority Leader of the Senate set to meet this week.
The risks of additional monetary and fiscal stimulus have prompted a weakening in the USD over recent sessions, and with the US economy having experienced a set-back in recent weeks, there could be additional support, on top of what’s being discussed, in Q4 or even Q1 2021.
There are no important US releases due this week, with June existing and new home sales data due on Wednesday and Friday intersected by the latest week jobless claims data on Thursday. The jobless claims data has been showing little signs of improvement in terms of the numbers of new claims, although the numbers of continuing claims continues to decline and it is this figure that should be watched closely to see if renewed regional lockdowns prompt a return to higher continuing claims in the weeks ahead.
The USD hasn’t yet been helped by the Q2 earnings season, but we have seen NASDAQ reach new highs, the only index of the three in the US to do so. Increased risk appetite is likely to hurt the USD, but it’s not clear that we’ll see this during this week.
Rest of the world
Likely more loosenings, as a sign of things to come
Last week saw little movement on the central bank front, with the exception of the Indonesian Central Bank who cut their interest rate from 4.25% to 4% on Thursday.
There are a lot of meetings this week, with the week beginning with the Kazakhstan Central Bank. The official rate is currently 9.5% having been cut in April from 12%.
The Nigerian Central Bank announces on Tuesday, Turkey, Ukraine and South Africa on Thursday and Russia rounds things off on Friday.
All the central banks have scope to cut interest rates, although South Africa, Ukraine & Russia may be reluctant having cut rates at the last meeting, and Turkey may be reluctant as inflation rates are running in well excess of their target. With the coronavirus outbreak showing little signs of slowing, further global monetary and fiscal loosening may still be required, in spite of the loosenings already sanctioned.
To read last week's quick take, please click here.