Last week much of the focus was on the ECB meeting and US inflation whilst growth data in the UK was also monitored. As expected, the ECB held interest rates at 0% following the latest policy meeting and there were no changes to the asset-purchase programme. The bank also upgraded its GDP growth forecasts for 2021 and 2022 with next year’s projection increased to 4.7% from 4.1% seen in March. President Lagarde mentioned that inflation will rise further in the short term due to base effects, temporary factors and the increase in energy prices. Yields in the US continue to be a big talking point. US consumer prices increased 0.6% for May, above consensus forecasts of 0.4% with the year-on-year rate increasing to 5.0% from 4.2%; the highest reading since September 2008. Sterling remains fragile as the market continues to speculate a delay in the lifting of the final stages of restrictions. It has been reported that senior ministers have signed off on the decision to delay the lifting of all legal restrictions on social contact. Prime Minister Boris Johnson is due to confirm the delay later at a news conference. In the meantime, UK GDP increased 2.3% for April, in line with expectations, but the industrial production data was weaker than expected for the month. Looking to the week, the main focus for the wider market will be on the FOMC meeting, where the market will be looking for signposting on monetary policy and tapering. Economic data from
Last week the market was focused on the likelihood and timing of an interest rate hike from both the UK and the US. From a UK perspective, the focus was on rhetoric following comments suggesting Bank of England officials are signposting for Q2 of next year. In the US, the focus was very much on economic data and whether this could support the case for hiking rates next year.Bank of England Deputy Governor Ramsden leaned towards raising inflation (a key metric considered when changing monetary policy). Ramsden stated that there was a risk that demand would get ahead of supply in the short term which could push prices higher. In addition, there was further speculation that underlying strength in the housing market would lead to a more aggressive Bank of England monetary policy within the next few months.The key data focus in the US was on the Nonfarm Payrolls. There was added focus on this following the disappointing miss from the previous month. Nonfarm payrolls increased by 559,000 jobs last month, which was helped by higher COVID-19 vaccination rates, while the unemployment rate fell from 6.1% to 5.8% in April. However, the headline figure was circa 100,000 below expectations and the US Dollar weakened as a result. The softer-than-expected report suggests there is no urgency for the Federal Reserve to begin tapering its monthly purchase of $120 billion in bonds to support the economy.Looking to the week ahead, important data has emerged from both sides of the pond. In the
Sterling pushes higher as the first signs of monetary policy normalisation has begun. BoE member Vlieghe stated that the first rise in the bank’s rate is likely to become more appropriate during the course of next year, with some modest further tightening to follow. He went on to advise that it will probably take until Q1 of 2022 to have a clear view of the post-furlough unemployment and wage dynamics, so a rise in the bank rate could be appropriate soon after. Providing this signal has given the Sterling a lift despite various challenges that it currently faces. Earlier in the week, BoE Governor Bailey acknowledged that the economic recovery in the UK is "quite unbalanced" and "the risk of high inflation expectations becoming entrenched is not our central view". However, there were some concerns that consumer spending could be losing momentum as the CBI retail sales index edged lower. In the meantime, concerns surrounding the Indian variant remain and could potentially hinder the final stage of unlocking on the 21st of June. In Europe, conditions continue to improve as vaccination rates pick up. To put this into perspective, at the beginning of May the EU have vaccinated 24% of the population and by the end of the month, the rate had increased to circa 38%. The German IFO business confidence index strengthened to a 2-year high. The current assessment and expectations index strengthened to levels above forecast. The IFO stated that economic recovery is gathering pace with a
Last week we saw another strong performance from Sterling with economic data strengthening its outlook. The labour market data showed a net decline in jobless claims with the unemployment rate also falling. Retail sales and economic activity data in the form of the purchasing managers’ index (PMI) were optimistic. Retail sale volumes surged by 9.2% compared with the consensus forecasts of 4.5% while the composite PMI for May showed its highest level on record. However, concerns started to emerge surrounding the Indian variant as it was believed it could hinder further relaxation of COVID-19 restrictions. The single currency remained at the forefront as optimism surrounding the EU vaccination programme provided net currency support. This was further supported as ratings agency, Moody’s expressed optimism that the EU recovery fund would support Southern Europe which helped underpin underlying Euro confidence. However, ECB Chief Economist Lane stated that price increases due to bottlenecks is not real inflation. Lane went on to say that the central bank still has a lot to do to create an organic inflationary environment via policy. The US Dollar capped its losses as Federal Reserve Vice Chairman Clarida stated that the central bank must be attuned and responsive to incoming results to guarantee that inflation is transitory before adding that the Federal Reserve would only act if the data threatened to increase inflation expectations. However, the Minutes from May’s Federal Reserve meeting stated that there was still a long way to go to meet the central bank’s goals.
Last week, the main focus was on US data following the disappointing US job figures in the previous week which dampened the longer-term interest outlook. US inflation may have reversed this chain of thought. The US consumer prices rose by 4.2% in April, the most since 2009 and above forecasts, adding concerns to inflationary pressures capping the economy’s longer-term performance which in turn resulted in the 10-year US Treasury yield surging to a two-week high. In addition, according to JOLTS data, there was an increase in job openings to a record high of 8.12 million with underlying confidence in the outlook remaining mixed following last week’s employment report. In the meantime, the Sterling was boosted as the government confirmed that the UK coronavirus alert level had been reduced from four to three due to reduced transmission rates and it also confirmed that the further easing of restrictions would take place this week in England. There are obvious concerns regarding the Indian variant, but the UK intends to speed up the vaccine rollout. The EU Commission increased the Eurozone 2021 GDP growth forecasts from 3.8% to 4.3% and the 2022 outlook was also upgraded. The Commission expects a significant easing of coronavirus restrictions during the second half of the year and the EU also announced that budget rules would be suspended until the end of 2022. The German and Eurozone ZEW sentiment both strengthened which helps reinforce the upgrade in forecasts. Looking to the week ahead, the market will once
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