What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Data points to V-shaped Recovery, but risks are elsewhere
Last week saw the UK’s plans for trade deals with the EU and US receive a double blow. The Telegraph reported that the UK government was preparing for no deal between the UK and EU before the end of the year. Meanwhile, the Financial Times reported that the UK’s hopes of a trade deal with the US were likely to also be dashed, with UK officials and the US’s Trade Representative Lighthizer playing down the likelihood of any agreement before the end of November. The prospect of no deal with either major Western economy has prompted some weakness in the GBP, particularly against EUR, with this dropping back below €1.10.
The UK economy had some robust data and surveys released last Friday. These pointed to very strong retail sales volumes, with June seeing volumes up 13.5% month on month after a 12.3% rise in May, excluding autos and fuels. That left volumes up 1.7% year on year. The provisional July manufacturing and services PMIs (Purchasing Managers’ Index) were equally as impressive, the manufacturing PMI rising to 53.6 from 50.1, and the services PMI rising to 56.6 from 47.7, its highest reading since July 2015. This points to a V-shaped recovery, suggesting pent up demand and currently sufficient financial resources.
GBP has rallied into the start of this week, trading above 1.28. Can it sustain this most recent rally, which appears to be driven by both the improving UK fundamentals and the concerns over the United States' inability to get on top of the coronavirus outbreak? Or, will the lack of progress on UK trade negotiations with the EU and US provide a roadblock to further GBP appreciation? This week sees limited UK data and survey releases due.
The July CBI (The Confederation of British Industry) distributive trades survey is due on Tuesday, consumer credit figures for June are released on Wednesday and the GfK (Growth from Knowledge) consumer confidence (final- July) on Friday. None of these releases are likely to offer much increased optimism about the scale of the UK rebound underway, with the markets looking for additional confirmation about the sustainability of the rebound. Ahead of next week’s Bank of England meeting, and the following week’s glut of data, which includes Q2 GDP (Gross Domestic Product), this week is a relative lull from an economic data and survey perspective.
Recovery seemingly on track as EUR outperforms
In Euroland, after extensive and elongated negotiations the EU unanimously agreed to the EU Recovery Plan and Multi-annual Financial Framework last week. The extent of the EU grants was scaled back from €500bn to €390bn, whilst low-interest loans rose from an original €250bn to €360bn after some Northern European countries objected to the initial plan. The EU will raise funds directly from the markets until 2026, will start making payments to countries from January 2021, and have agreed to repay the new debt by 2058. The news encouraged financial markets, which saw it as a game changer regarding EU cooperation, fiscally binding countries like never before. There was also good news in the form of manufacturing and services PMIs (provisional July), both of which increased to well above 50, pointing to a robust recovery from the Euroland economy after a few months of heavy output losses.
The EUR has started this week above $1.17, its highest level since October 2018 versus the USD. This week, the focus will likely be on Germany, with the July IFO (Information and Forschung / Germany’s Institute for Economic Research) survey released on Monday, Q2 GDP, July unemployment and July consumer price inflation released on Thursday, before Euroland inflation (July) and GDP (Q2) figures on Friday. Is Germany still lagging behind the rest of the Euroland in terms of growth and activity? Can the EUR build on gains made against the USD and GBP in the upcoming week?
USD weaker as government gets to grips
The US government began new discussions about additional fiscal stimulus last week. The Republicans in the Senate will outline their latest stimulus plan over the coming days, to counter the Democrats' plan from the House of Representatives. It has been reported that the plan will entail measures worth an additional $1 trillion, although that falls well short of the Democrat plan for over $3.5 trillion of stimulus, which has been on the table for weeks. The discussions over additional stimulus came as the US continues to struggle to get to grips with the COVID-19 outbreak, and just ahead of this week’s Federal Reserve monetary policy meeting and decision.
What will the Fed choose to do in terms of stimulus? Some members have been openly supportive of additional monetary stimulus, whilst others point to the additional fiscal stimulus being discussed as reason to hold back. The data from the US in recent weeks has pointed to some reversal in activity, with jobless claims increasing in the most recent week the latest example.
The USD has weakened as COVID fears continue to grapple the United States. This week sees US Q2 GDP figures released on Thursday, alongside latest week jobless claims figures. Prior to those releases we have the Conference Board consumer confidence index for July and trade figures for June. Following, the Q2 GDP figures, there are US personal income and spending figures for June and the final July University of Michigan consumer sentiment figures. The US figures are expected to show an almost 9% contraction in US economic output (34% quarter on quarter annualised contraction), but that might not be the full story. Signs of retreating confidence in July, because of renewed regional lockdowns, could prompt some decline in risk appetite. What might that mean for the USD?
Rest of the world
All eyes on the Americas, as rates expected to be cut
Last week’s central bank meetings saw an unexpected cut in interest rates from Kazakhstan, to 9% from 9.5%. As far as the other meetings were concerned, Ukraine didn’t cut when they were expected to, whilst the South African and Russian central banks cut by 25 basis points, although the Russian central bank was expected to cut by 0.5%.
This week is fairly light in terms of central bank meetings outside of the Federal Reserve meeting and announcement on Wednesday. The meetings from the Colombian and Dominican Republic Central Banks on Friday could see rate reductions from both central banks, with new coronavirus infections high in Colombia, and seemingly having only recently peaked in the Dominican Republic. The damage being done to economies in Central and South America is yet to be fully understood, but with no likelihood of a monetary tightening from the Fed anytime soon, there is more scope for cuts from both.
To read the quick take from last week, click here.