Parky’s weekly look ahead – 22 June 2020

23 June 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

Boom in retail as lockdown lifts, but will that boost Sterling?

The UK’s raft of releases last week recorded a significant improvement in retail sales and signs that the public finances were initially under less stress than first recorded. However, the news from the labour market provided a stark reminder that the UK economy has a long road back to full health, with over 600k jobs lost according to the PAYE (Pay As You Earn) data.

This week, the attention switches to provisional June PMI (Purchasing Managers’ Index) readings. These are released on Tuesday and are expected to record a significant further improvement; however, manufacturing and services are still set to be in contraction, again emphasising that the recovery is set to be multiple quarters in the making. The pound had a bad week last week, heading sharply lower against the USD and EUR. It has begun this week in better spirits, but how long will that last and will the UK PMIs help or hinder the improved confidence? As we head towards the end of the quarter will the GBP make some renewed gains against the other majors, or will it remain stuck in ranges, waiting for a breakout? Bank of England Governor, Andrew Bailey, in a Bloomberg interview, indicated that he was looking at reducing the balance sheet before raising interest rates, but there was no suggestion of any tightening over the coming quarters.

Euroland

Will the PMIs disappoint?

Euroland PMI indicators for June will also be closely watched this week, along with the German IFO (Information and Forschung / Research) - also for June. Will these figures point to a pick-up in activity, or will they disappoint as the current situation index of the ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) did? 

The Euroland economy is also suffering a spike in infection rates in Germany; will that make businesses and governments more cautious? Could it harm the euro, which has slipped back after an impressive rally in recent weeks?  The euro is unlikely to be materially adversely affected by this week’s surveys, but given that we are rapidly approaching the end of the quarter, a poor finish for the euro could increase the risks of a drop in the early stages of Q3 as well.

United States

Finally turning a corner? Or still finding its feet?

US data and surveys have pointed to a recovery in the US lately, although last week wasn’t all good news with the labour market data suggesting that the pace of recovery has slowed dramatically. This week’s surveys and data centre around the releases of provisional June PMIs, GDP (Gross Domestic Product) final Q1, and personal income and spending (May). There are no particular banana skins for the USD in any of these releases, although if spending has bounced by more than expected, that could help risk appetite, which in turn could end up being USD negative. The Federal Reserve Chair, Jerome Powell, made it clear in testimony last week that there were no plans to tighten monetary policy for the foreseeable future, but could the Fed start to dial back the balance sheet expansion if the data continues to improve, and what might that mean in the medium term for the USD? There are lots of confusing signals for the USD heading into quarter end.

Emerging Economies

Meetings, meetings, and loosening belts?

In terms of central bank meetings, this week sees a lot of emerging economies holding meetings. There are loosening risks from the Philippines, Turkey and Mexico, all on Thursday, whereas Hungary, Tuesday, New Zealand, Thailand, and the Czech Republic on Wednesday are not expected to loosen. With infection rates climbing in parts of Africa and the Middle East, there could be the need for further loosening in these economies. Could we see some pressure on the emerging market currencies if there is further compression on interest rates between those and major economies?

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