Last week, the Euro was weaker across the board as there was further evidence that the European Central Bank (ECB) is concerned about the exchange rate and its impact on the economy. ECB council member Knot stated the bank would closely monitor recent Euro strengthening and determine its impact on inflation. He added that the bank could cut the deposit rate further if that proved necessary, to keep the inflation target in sight. There were also reports that ECB officials consider that markets are underestimating the odds of a rate cut. The overall developments last week increased speculation that the bank was making a more determined effort to curb Euro strength.
The dollar continued to ebb and flow in line with risk sentiment, which was largely driven by Covid developments. The biggest focus on the US economy was the Federal Open Market Committee (FOMC) meeting. The Federal Reserve held interest rates in the 0.00-0.25% range, in line with expectations, and there were no changes to the asset purchase programme with Treasury purchases of at least $80bn per month. The committee reiterated that the accommodative policy will continue until inflation runs moderately above 2% for some time, in order to reach the average target of 2%. FOMC Chair Powell repeated that any short-term inflation increase would be transient and that talk of tapering is premature.
In the meantime, Sterling remained supported despite risk tones fluctuating. The biggest drop for Sterling was centred around fear of an extended lockdown. PM Johnson stated that the country remained in a perilous situation, and that it would not be possible to re-open schools before March 8th. However, this was offset by optimism surrounding the vaccine programme, along with strong phase-3 trials for the Novavax vaccine with efficiency of close to 90%. In terms of data, the market focused on the unemployment numbers, as the woes of the high street continue to make headlines. UK unemployment increased to 5% in the three months to November from 4.9% and below expectations of 5.1% while the universal claimant count increase was held at 7,000. Overall, the data was slightly stronger than expected but the market remains cautious.
Looking to the week ahead, it is likely that Covid sentiment will continue to be the main driver of price, as nations continue to navigate restrictions and vaccine rollouts. Of particular focus for the UK will be Thursday’s policy update from the Bank of England’s Monetary Policy Committee. This will also be one of the occasions when the Bank updates its forecast and issues its quarterly Monetary Policy Reports. In the meantime, the US employment data as always will provide a monthly focus especially after last month’s first negative number since April.
- UK/EZ and US Manufacturing
- UK Mortgage Approvals
- EZ Unemployment
Manufacturing data is set for release from the UK, Eurozone and the US with particular focus on the US data as the UK and Eurozone has already been pre-framed. UK mortgage approvals and subsequent net lending figures will be watched to see what impact lockdown has had with viewing continuing. The unemployment rate is expected to remain at 8.3%
- UK Nationwide House Price Index
- EZ Prem Flash GDP
The headline figure will be the EZ GDP figure. There are 3 versions of GDP released, and the Preliminary Flash release is the earliest, and thus tends to have the most impact. As lockdown restrictions were increased in November and December it will not be a surprise to see a negative figure, the focus will be on how negative it will be. In the meantime, following the mortgage approvals the previous day the market will keep a close eye on the nationwide house prices.
- UK PMI Services
- US ADP Employment
- US ISM Services
With the service data being the dominant sector in the UK, the market will keep a close eye on the Purchasing Manager’s Index (PMI) data. This release may have slightly less impact as this is the second of two readings for the sector with no change expected The US ADP employment report is set for release ahead of Friday’s US Government’s labour data. Historically, the figure is reviewed and articulated, but rarely causes volatility as the alignment with Friday’s has often been off by a significant margin. However, it is still viewed as a potential signpost of the direction of job growth or contraction.
- Bank of England Policy Meeting
- US Weekly Jobless Claims
The Bank of England’s Monetary Policy Committee (MPC) will be a key focus for UK financial markets. This will also be one of the occasions when the Bank updates its forecast and issues its quarterly Monetary Policy Reports. The BoE is also due to provide an update on their recent discussions with banks about the feasibility of a of negative interest rates. Recent speeches by various members suggest that the MPC may be divided on its potential effectiveness. Some of the external members see it as an effective tool in boosting the economy, whilst Bailey and some of the other internal members are seemingly more concerned about the potential negative effects on the financial sector. Monetary policy is expected to be left on hold at 0.1% and the target level for asset purchases at £895bn. However, the focus will be on the BoE’s view on the economy especially given the vaccine rollout, negative interest rates and what there forecast are moving forward.
- US Nonfarm payrolls
The all-important labour data is set for release which will be used to provide the market an indication of the direction of the US economy. There continues to be big changes in the US with a changing of the guard at the White House, Covid restrictions and future governance. In the meantime, the labour data is expected to a weakening picture. The focus will be on the employment numbers for January will be if there is a second-consecutive decline after they fell in December for the first time since April.
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