FX outlook: Parky’s quick take – 17 August 2020

August 17 2020

Neil ParkerFX Markets Strategist

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

United Kingdom

It looks bleak, but optimism lies ahead

The UK Q2 GDP (Gross Domestic Product) figures were expected to be bad, and so they turned out. Q2 output shrank by 20.4% quarter on quarter, having dropped by 2.2% in Q1. Consumption spending was 23.1% lower, and investment was over 25% lower; however net exports were a positive contribution to economic output. There was some good news hidden in the figures. June manufacturing and industrial production rose by more than consensus expectations, construction output was up 23.5% vs the 15% consensus, and services output was down less than expected year on year, despite a slightly smaller rise in June due to an upward revision to May’s figure.

There was also good news from the housing market, with the Royal Institute of Chartered Surveyors reporting a turnaround in house prices, rising in July on average, having fallen in June.

UK labour market figures though painted a relatively bleak picture, with employment dropping in the three months to June by 220k, and PAYE (Pay As You Earn) data pointing to a further 114k jobs lost in July, taking the total to over 700k since the beginning of March.

GBP finished last week on a slightly more upbeat tone, rising against the USD and EUR. However, the pound has struggled to make new highs against the USD, despite its own troubles and setbacks, and against the EUR remains towards the bottom of the recent trading range. What does this week have in store for the pound fundamentally? The major releases are July consumer price inflation figures on Wednesday, and then the provisional GfK (Growth from Knowledge) consumer confidence and CIPS (Chartered Institute of Purchasing and Supply) PMI (Purchasing Managers’ Index) figures for August, along with retail sales and public finances figures for July, all on Friday.

In other countries there have been some upside surprises from consumer price inflation recently, so could the UK have the same fate? Consumer confidence is likely to have improved further in August, as should the manufacturing and services PMIs, whilst retail sales are predicted to rise by only a modest amount in July as activity could have been undermined by the re-opening of some services sectors.

The public finances numbers will also prove interesting. Will net borrowing have reduced versus June? It should have done as businesses relied less on government support and more on returning customers. Overall, there could be some decent fundamental data released from the UK, and some stronger outturns, but will these be sufficient to support some additional GBP gains?     


Focus is on the PMIs, in the absence of anything else

News of rising levels of coronavirus infections in France, Holland, Germany and Malta, to go with the increase in Spain over previous weeks, indicate that there has been a resurgence for the first time since the lockdown restrictions were eased in May/June. In Italy also the numbers of new infections also seems to be rising, but from a very low base, and in all of these countries there are few signs that hospital admissions are dramatically higher, or the numbers of critical cases/deaths is rising significantly either.

The increase in infections has been linked to the young, with 20-39 year olds accounting for up to 40% of the new infections according to a report in the Guardian. Even so, the news has led to the UK re-instigating the 14-day quarantine period on passengers returning from all of these countries with the exception of Germany and Italy, and the European Commission arguing for a robust response to the rise in infections in Spain. Is this likely to dominate the improving economic outlook?

The week ahead is dominated by the release of preliminary August PMIs for manufacturing and services at the end of the week. There seemed to be some stalling in activity improvements from the provisional to final PMI releases in July; however, more sectors of the Euroland economy have returned to some semblance of normality, and confidence has risen following the European Commission’s landmark COVID fiscal assistance programme. Does this mean that activity will have enjoyed another surge in August? In the absence of any other data, major events, or speeches, the EUR, which rallied marginally against the USD last week, could benefit towards the end of this week. A lot rests on positive developments not in the economy, but in the fight against the COVID-19 outbreak and how well, or badly, markets perceive that it is going.

United States

Politics still dominating economic momentum

The US markets seesawed last week, swinging from pessimism to optimism and back again as the Democrats and Republicans remained deadlocked in talks over additional fiscal stimulus. The talks have resolved little in terms of differences and, with the Presidential battle heating up after Joe Biden selected Senator Kamala Harris as his VP nominee, perhaps those differences will remain. The US media are suggesting that the talks may not resume until September, with both sides laying that blame at the other’s door.

Meanwhile, the US economy looks to still be in recovery mode, albeit retail sales values grew disappointingly in July versus a robust June, and there are increasing signals that the rate of transmission of COVID-19 is slowing down in the US, having re-accelerated in June and peaking in July (at over 78k confirmed infections). In the last couple of weeks, the trend rate of infections has slowed, and the 5-day average is a little under 52,400 (up to and including 13th August). It is too soon to sound the all clear, but the US looks to be past the peak in infections.

The US economy did post some encouraging numbers, with industrial production beating expectations, growing by 3% in July after a 5.7% gain in June, and the preliminary August University of Michigan consumer sentiment reading rose slightly, having been expected to drop back.

There is little important due for release this week in terms of data or events. One to look out for is the Federal Open Market Committee (FOMC) meeting minutes, which should shed more light on discussions at the Federal Reserve regarding the need for additional monetary stimulus. There seems to be no rush from the Fed to add to its raft of support measures, with the total expansion in Fed assets having levelled off just under $7 trillion. If there is a renewed downturn in activity or if there is some market dislocation, the Fed may be encouraged to act, but for the time being the emphasis remains on fiscal, rather than monetary, intervention. The USD remains on the defensive, but the majors made little progress against it last week, so perhaps this week might see some modest recovery of recent losses?

Rest of the world

Watchful eye on the Philippines to follow Mexico’s example

Elsewhere in the world, the Mexican Central Bank cut interest rates by 50 basis points, taking the official rate to its lowest level since 2016. Mexico passed over 500k infections last week, and its death toll is now above 55k, making it the third worst in total deaths globally. There could be additional monetary stimulus in the coming months, with thus far only limited fiscal assistance being provided (around 1% of GDP).

Could this signal additional monetary loosening to come from the emerging markets, where the fiscal stimulus has been highly limited thus far? This week sees the Indonesian, Filipino and Turkish central banks due to announce, along with the Norges Bank, which is widely expected to do nothing.

The Indonesian central bank has cut 25 basis points at both of their last two meetings, and rates are a full percentage point lower than where they started 2020. The rupiah has also been under pressure, and that might restrain them from any additional cuts.

The Turkish central bank is not expected to lower interest rates, with new COVID infections having reduced sharply from their peak in April, and showing little sign of resurgence.

As for the Philippines, they could cut interest rates by an additional 25 basis points, despite protestations to the contrary from the Governor Diokno recently. Low growth and weak inflation may be sufficient to take the overnight rate to fresh lows of 2%.   

To read the previous quick take, click here


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