What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
UK set for Q2 GDP (Gross Domestic Product) release as Pound drops off its highs
The headline from last week was the rally in GBPUSD, which at one stage took it to its highest level since 9th March, prior to the COVID-19 lockdown. It fell back towards the end of the week, but that rally meant that over the space of 2½ months, it had bounced over 11 cents. That said, the pound has struggled against other majors, so this is less about the GBP's resurgence than it is the USD's losses.
Last week saw UK officials indicate that the EU may be on the brink of agreeing to more favourable terms for a trade deal, although there was little concrete evidence of any change in the EU’s stance in the news report. This week, the NatWest sponsored regional breakdown of the July PMI (Purchasing Managers’ Index) figures showed strong activity in the West Midlands, North East, Yorkshire & Humber and South West, whilst Scotland and Wales were the weakest performers.
For the week ahead, the attention will be on the Q2 GDP figures released on Wednesday. These are expected to record a decline of 20%+ quarter on quarter in UK output, making the UK the worst performing out of the UK, US and Euroland in Q2. There may be a slightly better outturn than consensus expectations, but with most of the services sector shut, that will have had to come from construction and retail, which reported some recovery late into Q2. Can the pound benefit from better data? It hasn’t thus far, and there is likely to be more interest in the July consumer prices, public borrowing and retail sales figures due for release next week.
On the path to recovery, except Germany still struggling to gain confidence
Euroland is showing more signs of recovery. Last week’s PMIs recorded a further improvement in the manufacturing reading from the initial outturn, but services activity was marginally weaker than preliminary figures recorded. Italian, Spanish and Irish industrial production figures rose sharply, with Ireland’s industrial production now 5.1% higher than a year earlier.
Already this week we have seen an improvement in the survey data. The July French industrial sentiment indicator reached its highest level since November 2019, whilst the Euroland Sentix investor confidence reading rose to -13.4 in August, its highest level since February 2020.
Whilst signs of recovery have been intensifying, the next big test is the German ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) reading for August released tomorrow. The expectation index is forecast to be weaker and current conditions stronger than in July, but this would still put Germany at the bottom end of the recovery spectrum on confidence indicators at least.
The EUR is consolidating on recent gains, but for any additional gains it would require either a further problem to beset the US, or its economy to show real signs of sustained improvement.
Talks set to resume, but USD still looking for solid ground
The news from the US seems to be improving in terms of the number of new confirmed cases of COVID-19. From a peak of 78k daily cases a few weeks ago, the number of new daily cases is now around the 55k mark on a recent average of the past 5 days. There is still some way to go before the outbreak is brought under control, but perhaps the latest surge is dampening down.
Last week saw talks breakdown between the Democrats in the House of Representatives and Republicans in the Senate over a new fiscal stimulus plan. The President suggested that he would use whatever executive actions he could to support US citizens. Talks may resume this week, but with a looming deadline to get the stimulus measures in place, and a Presidential election race that is rapidly moving towards a conclusion, both sides are digging in. Political events could have a larger effect on markets than thus so far.
In terms of this week’s data releases, July consumer prices, retail sales and industrial production will all be closely watched by markets. These, however, are unlikely to alter the dynamic for the USD, which looks as if it is trying to find a base. Unless there is a raft of positive news on the economy, or some negative risk appetite events which occur, the USD is likely to continue its search for a more solid foundation to rally from this week.
Rest of the world
High probability of more global cuts, and still room for more loosening
Last week Brazil, Georgia, and Romania all cut interest rates whilst India unexpectedly left interest rates on hold, when markets had been expecting cuts to the repurchase and reverse repo rates. The rupee weakened against the USD in the aftermath of that decision, but since then we’ve seen it turn around.
This week has already seen the Ugandan Central Bank leaves interest rates at 7%, and New Zealand, Belarus, Serbia, Egypt and Peru are all expected to leave monetary policy unchanged.
The Mexican central bank is forecast to lower interest rates by 50 basis points to 4.5% from 5%, and there is still room globally for a loosening in monetary policy if the upturn in global activity takes longer to gather momentum.
Egypt and Belarus could surprise with cuts given the scope they still have in official rates (9.25% and 7.75% respectively).
To read the previous quick take, click here.