FX outlook: Parky’s quick take – 13 July 2020

July 13 2020

Neil ParkerFX Markets Strategist

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What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.

Great Britain

Further re-openings and bigger boosts to kick-start the economy

Last week focused on the UK Chancellor, Rishi Sunak, who delivered a Summer statement which contained further fiscal stimulus measures. The Chancellor announced a bonus scheme to get furloughed employees back to work, worth up to £9bn, support for the hospitality industry with a cut to VAT, support for restaurants and takeaways with government sponsored discounts for eating out, and a cut in stamp duty to boost housing transactions. The package measures meant the government was spending a further £30bn in targeted support, but the Chancellor also confirmed that the furlough scheme would be brought to an end in October.

There was little data or surveys of note last week, though upside surprises from RICS (Royal institute of Chartered Surveyors) house price balance survey and the construction PMI (Purchasing Managers’ Index), both for June, were encouraging in terms of the UK’s recovery.

Also last week, the government announced that other elements of the economy would be allowed to re-open, a further sign that the economy is gradually returning to normal. This week sees May monthly GDP (Gross Domestic Product) figures released. This was when the economy started to unlock, so a solid rebound is expected. Could the bounce be better than consensus forecasts and would that support a rally in the GBP? There are also consumer prices and labour market releases due this week, with inflation expected to remain subdued, and the labour market forecast to report a sizeable shrinking in employment through March to May.

The pound has bounced around against the USD and EUR lately, with a recent rally against the USD reversed towards the end of last week, whilst against the euro it fared better, reversing away from its lows. Will this week help the pound further? It started stronger this morning, but hasn’t held onto those gains.


Some economies starting to move, but still sluggish in the key zones  

Europe saw very little of consequence released last week, though there were better than expected May industrial production figures from France and Italy at the end of the week. Italy in particular enjoyed a very sharp bounce back in activity of over 40% compared to the previous month, although that left production still 20% lower than a year earlier. 

There was also a surprise in terms of within the Eurogroup of finance ministers, who selected Irish Finance Minister Paschal Donohoe to head the finance group, whereas Nadia Calvino from Spain had been expected to win. This was viewed as a win for the smaller members of the euro zone, with the likes of Germany, France and Spain having supported Calvino.

This week sees the Euroland aggregate industrial production figures for May released on Tuesday, but it will be the German July ZEW (Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) survey, due at the same time, that is likely to garner the greatest market attention. German seems to have lagged behind the rest of the Eurozone in terms of the extent of the recovery, with France reporting renewed expansion in manufacturing and services, and the likes of and Spain and Italy reporting higher manufacturing PMI readings than Germany.

Will Tuesday’s ZEW report further improvements in expectations but continued slow progress in the upturn of current conditions? What will the European Central Bank’s assessment of the economy be when they meet and decide on monetary policy on Thursday? Economies are moving back towards normality, but are they moving fast enough and are there downside risks to the inflation outlook? 

United States

Rising infections stagnating economic recovery

In the US, last week saw a further surge in infections in states such as Florida, which has now become a hotspot for infections, and the US continues to struggle to bring the coronavirus outbreak under control. The shutdowns that continue to occur in numerous states across the US will potentially slow the recovery of the economy or inflict renewed damage on the labour market.

The Federal Reserve will release its latest assessment of economic conditions on Wednesday, ahead of its end of July FOMC (Federal Open Market Committee) meeting and monetary policy decision. There is currently no pressure on the Fed to move in either direction on monetary policy, but the longer the coronavirus outbreaks take to be brought under control, the more likely the scales will tip in favour of additional monetary support.

This week sees US industrial production, consumer price inflation and retail sales all for June due for release, as well as July surveys from the Philly Fed and University of Michigan.

The USD has been through some ups and downs lately, but a further improvement in risk appetite would likely see it back on the defensive. That said, if the world’s largest economy is taking its time to recover, will that damage the pace of the global recovery and push money back into safe havens?

Rest of the world

No signs of rates cuts for most territories

There are a number of central bank meetings this week. The National Bank of Poland kick things off on Tuesday, but rates are not expected to be cut, and they are already at historic lows of 0.1%. The Bank of Japan meet early on Wednesday morning, although with official rates already at -0.1%, there is very little chance of any additional loosening.

The Bank of Canada and the Chilean Central Bank also meet on Wednesday, but neither are expected to reduce interest rates further, with both close to zero at 0.25% and 0.5% respectively. Finally, The Indonesian Central Bank and the Central Bank of South Korea meet on Thursday. They are expected to leave interest rates on hold, having cut 25 basis points at their last meeting, but there is a reasonable chance that Indonesia reduces interest rates from 4.25% to 4%, bringing their rates more into line with the rest of Asia.

To read last week's quick take, please click here.


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