While last week was a short one, there was still plenty of items on the docket to analyse. The Bank of England’s quarterly inflation report and interest rate decision was released. The Bank of England held interest rates at 0.1%, in line with expectations. There was no change to the total asset-purchase programme, although chief economist Haldane dissented and called for a cut in purchases. There was a sharp increase to the 2021 GDP growth forecast by 7.25%, although the 2022 outlook was cut slightly which was not a big surprise given the success of the vaccine rollout. A longer-term factor was that unemployment was also downgraded significantly from 6.4% to 5.1% for the end of the year. Governor Bailey expected that higher inflation rates would be transitory, although markets were less convinced. The UK local elections also provided a domestic focus with political uncertainty still fresh in people’s minds. The primary focus was on the Scottish vote with the ongoing debate surrounding a second Scottish referendum. Over the weekend, the results were released with the Conservatives strengthening their grip on power and the Scottish National Party (SNP) failing to obtain a majority. This boosted the Sterling as it pushed the potential for a second Scottish referendum slightly further away. In the meantime, the most eagerly watched figures were from the US employment report. The headline figure turned a few heads with expectations of job creation close to one million given the reopening of the economy in April. The
The main focus last week was the FOMC meeting as the market keeps deliberating the ongoing yield debate. Fed Chair Powell stated that a transitory increase in rates this year would not meet the criteria for raising interest rates and that the economy is a long way from its goals while near-zero interest rates remain appropriate until these targets are met. In addition, Powell has previously laid out that tapering would come before any discussion on shifting rates. Powell added that it is not time to talk about tapering yet and that it is doubtful whether there will be a substantial increase in inflation while slack remains in the labour market. The overall dovish tone sent the US Dollar lower as markets parred expectations for action from the Federal Reserve.In terms of data, economic readings showed two contrasting economies. The US economy expanded by 6.4% on an annualised basis in Q1, propelled by a 10.7% rise in personal consumption. Growth could be even stronger in Q2. In contrast, Eurozone Q1 growth fell by 0.6%, signalling a return to recession as Covid-19 containment measures were extended.Looking to the week ahead the UK’s focus is likely to be twofold. The Bank of England (BoE) policy decision on Thursday takes centre stage for sterling markets, but there will also be attention on Scottish and Welsh parliament and English local elections. Across in the US, the main market focus will be the US labour market report due on Friday. TuesdayUK Mortgage
The short answer is potentially. Background In recent years we have seen politics have a significant influence on FX markets, in large part due to the overarching and slightly controversial nature of the subject matter; Brexit, President Trump and other leadership challenges to name but a few. In recent days, we have seen further controversies surrounding Prime Minster Johnson which are being looked at independently. Also, it has not been short of controversy with Scottish National Party (SNP) leader Nicola Sturgeon weathering the storm and remaining in power. May 6th will see the Scottish parliamentary election with the SNP with a second independence referendum front and centre of its manifesto. The SNP currently hold 61 seats in a 129-seat parliament. If the SNP does not increase its overall majority, it will find it difficult to credibly continue its rallying call for a second independence referendum. If we see a larger majority than 65, it will be expected that further pressure will be put on the UK government to grant another independence referendum. Why Does This Matter? Sterling has been very sensitive to political uncertainty in recent years and despite the UK leaving the EU, Brexit concerns remain as ongoing discussions continue. In recent days, tension has peaked as French minister Clement Beaune warns 'retaliation measures' will be taken in sectors like financial services if fishing promises agreed between the UK and EU aren't met. Whilst we have seen Prime Minister Johnson continue to rule out a second independence referendum, his
Eurozone Vaccine Boost but Double Dip Recession Looms as the Market Focuses on this Week’s FOMC Meeting
Last week there was a vast amount of economic data released from the UK but in hindsight, this failed to provide any significant directional change in the value of the sterling. Labour data was positive as the unemployment rate declined from 5.0% to 4.9% with a smaller than expected increase in jobless claims. Retail sales increased 5.4% for March, well above the market expectations of 1.5%, while government borrowing was above forecasts. In the meantime, inflation was just under forecast. The significant hindrance to the Sterling was the risk-off tone following as the WHO stated that new COVID-19 cases are rising in all parts of the world except Europe.In Europe, the ECB made no changes to interest rates following the latest policy meeting, in line with expectation, and in line with consensus forecasts. There were also no changes to the asset-purchase programme with the total envelope for PEPP bond purchases remaining at EUR1850bn which will be maintained until at least March 2022. As announced at the previous meeting, purchases will move at a faster pace this quarter before inevitably slowing down again. There was a degree of cautious optimism in Europe which strengthen the single currency supported by the EU announcement that it had secured a further 100 million doses of the Pfizer vaccine and the Johnson & Johnson’s resumption of the COVID-19 vaccine rollout across Europe. Additionally, economic activity in both the services and manufacturing sector accelerated.It was a quiet week in terms of economic data for the US.
Last week, the UK focus was on the reopening of the hospitality sector and non-essential shops whilst data surrounding economic activity was largely ignored due to the historic nature and lockdown conditions. The market will focus on the money spent now that restrictions have been reduced. In particular, the impact on new COVID-19 cases will be watched with further restrictions easing on the roadmap, but not before 17th May. The Bank of England announced that chief economist Haldane would leave the bank in June. Haldane has talked up the recovery outlook this year and adopted a generally more hawkish stance. His departure could tilt the balance on the committee significantly and lead to a more dovish policy stance over the medium term with increased resistance to higher interest rates. The single currency pushed back towards psychological levels against the US Dollar. This was in large part due to the Italian government who announced a stimulus package worth €40bn which helped underpin Euro sentiment. Data and COVID-19 conditions remain dovish. German Chancellor Merkel stated that infection rates are too high and that the third wave may be the toughest. Delays to the Johnson & Johnson vaccine could be a significant setback given that the EU has placed huge orders for the vaccine. In the meantime, the German ZEW economic confidence index retreated and was below consensus forecasts. The FOMC continues to reaffirm that interest rates will remain at record lows for a sustained period, however, data suggests that the market
Sterling On the Backfoot Whilst the Market Will Continue to Closely Watch Us Data and Central Bank Tone
Last week we saw Sterling under pressure in large due to COVID related matters. There were also fresh reports that the UK would face vaccine supply difficulties over the next few weeks. This in turn could result in the slowing pace of the COVID vaccinations in the UK could ultimately delay the government’s plans to reopen the economy further with the reduction of restrictions in five weeks’ time. In addition, there were some reservations that the UK advantage over the Eurozone was set to narrow over the next few months. However, there was some positive news from the UK economy as the UK PMI construction index strengthened to its strongest reading since September 2014.Oppositely, the single currency strengthened on vaccine hopes. Reports from EU Commission internal documents signal that the EU was on track to vaccinate close to 60% of the total population by the end of June, which would also imply that the EU is likely to exceed the target of 70% vaccination rates by the end of the Summer. The Euro has been trailing large parts of the developed world in terms of vaccine deployment so a pickup could restart a faltering economy.In the meantime, focus in the US remains on bond yields and the path of interest rates. Fed Chair Powell was speaking at the virtual IMF meeting. He stated that monetary and fiscal policy, allied with the vaccination programme, is creating a brighter outlook. He also noted, however, that he wants to see a string of
US Economy Continues to Show Positive Signs as the Market Focuses on Comments from the Central Bank this Week
Last week it was a short one as the UK and Europe celebrated Easter weekend. Much of the focus was on the US labour data which was released on Friday. Following the positive data trend seen from the US Labour Department, non-farm payrolls soared by 916,000 jobs last month, marking up its largest gain since late August, while February data was revised to be higher. Unemployment declined to a 12-month low from 6.2% to 6.0% in line with market expectations. Following this on Monday, the Institute of Supply Management (ISM) services sector index strengthened sharply to a record high of 63.7 for March.Bank of England Monetary Policy Committee (MPC) member Vlieghe advised that rapid growth is required to close the gap compared with the pre-pandemic growth roadmap. He noted that a few quarters of good growth would not imply that the central bank can put on the brakes and tighten policy. He also added that any increase in inflation would not be enough this year to say that the economy does not require monetary support.In Europe, overall confidence in the region remained weak. This was illustrated by reports that Italy was set to cut its GDP forecast for 2021 growth from 6.0%. to 4.1%. This was further compounded when French President Emmanuel Macron announced a nationwide four-week lockdown, an alarming sign that Europe is yet again losing control of the pandemic.Looking to the week ahead, the market will continue to focus on US data following the bullish labour data last
Last week the focus was on the vaccine news story with the EU summit and the ongoing US yield debate. German Chancellor Merkel stated that the country is now in a new pandemic while French President Macron advised new short-term restrictions. EU leaders, in theory, backed the potential to block vaccine exports and Commission President Von der Leyen stated that AstraZeneca must catch up on promised deliveries before exporting doses elsewhere. The EU health director stated that he was optimistic that the EU would hit a 70% vaccination target by late summer, but concerns continued, and the Euro retreated.The Sterling was dented by the potential impact of vaccine disruption because of the ongoing tensions with the EU along with the risk of the move following the Suez Canal crisis. Softer inflation did little to help the currency. Inflation declined from 0.7% to 0.4% for February, well below expectations of 0.8% with core inflation rates at 0.9% from 1.4%. The lower-than-expected inflation rate will dampen any expectations of higher yields and curb currency support. However, the Bank of England Chief Economist Andy Haldane stated the UK economy could see a “rip-roaring” recovery even if consumers spend just a bit of the additional savings they accumulated during the COVID-19 crisis.In the meantime, US Dollar sentiment was mixed following comments from central bankers. Dallas Federal Reserve Bank President Kaplan stated that his base case is that there will be a temporary surge in prices this year while inflation will settle down next year.
Last week the market was focused on the central bank meeting from both the FOMC and BoE as it continues to look for directional clues on their thoughts regarding recovery and the path of interest rates. The US FOMC held interest rates at 0.25% and made no changes to the bond-buying programme which was in line with consensus forecasts and with unanimous votes. There was a sharp rise in the 2021 GDP growth forecast from 4.2% to 6.5% with unemployment expected to decline sharply. During the revealing of the all-important dot plot, seven members expected rates to increase in 2023. The median projection for rates remains unchanged, contrary to market expectations that there would be a shift to forecasting a rate hike. Federal Chair Powell reiterated that the central bank is strongly committed to achieving its goals and will continue to provide support for as long as is needed. The Bank of England held interest rates at 0.1% following the latest policy meeting and made no changes to the asset purchase programme. Both decisions were by a 9-0 vote and were in line with market expectations. The central bank expressed cautious optimism over the outlook with the potential for the economy to recover more quickly than expected, although the committee also reiterated that the outlook was highly uncertain. The MPC reiterated that there was a high barrier to policy tightening while Chief Economist Haldane remained optimistic over the outlook. Echoing the positive sentiment, Ipsos MORI’s latest Political Monitor reveals that
Last week the key focus was the ECB meeting as the market was keen to decipher their stance given the recent turmoil. In addition, both UK and US data was under scrutiny. Starting with the ECB, the central bank made no changes to interest rates. Bank President Lagarde stated that the overall economic situation is to improve in 2021, but uncertainty remains. Lagarde also noted that the inflation pick-up is mostly due to transitory factors, although projections also see a gradual increase in underlying inflation pressure. The 2021 inflation forecast has been revised up to 1.5% from 1.0% previously, but with only a marginal increase in the 2022 forecast to 1.2% from 1.1%. The Euro strengthens on the back of the meeting as it was less dovish than anticipated. In the UK, GDP declined 2.9% for January compared with expectations of a 4.9% decline, although there was a sharper than expected decline in industrial production. Overall confidence in the UK economy remained robust with expectations that there would be a strong recovery as lockdown measures are eased. Bank of England Governor Bailey stated that contingency planning for negative interest rates did not imply any intentions for moving in that direction. He added that the UK economy faced two-sided risks to the recovery and that risks were tilted downwards for now, but the risks are gradually diminishing. As far as inflation is concerned, Bailey noted that the rate would increase in the short term and it will be challenging in