What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
UK set for quiet data week. Will the GBP suffer?
The UK data last week was generally stronger than expected. Firstly, the July consumer price inflation figures recorded an unexpected rise in headline and core rates, and that was then followed by robust retail sales and a smaller fiscal deficit, again both for July. These figures helped to propel the pound to its highest level since the beginning of the year, but that strength didn’t last. Perhaps the most encouraging figures were the PMI (Purchasing Managers’ Index) surveys (provisional August), which saw the manufacturing PMI rise to its highest level since December 2017, whilst the services PMI rose to its best reading since August 2014. Even these were insufficient to maintain the upward momentum for the pound, which slipped back from the highs it reached on Friday, as risk appetite was once again under pressure.
Though unsurprising, the restarted UK/EU trade negotiations broke up without any progress having been made. Michel Barnier, the EU Chief Negotiator, sounded downbeat on the prospects for any agreement, and the UK’s chief negotiator, David Frost, was exasperated by the EU’s stance regarding obtaining agreement on the areas of greatest contention first, before they turn their attention to the legal text on the areas of harmony.
With GBP having finished last week on the back foot, having enjoyed rallies to recent highs earlier in the week, what will upcoming events mean for the GBP? There is a limited data calendar, with only the August CBI (The Confederation of British Industry) distributive trades survey due. That won’t be of any interest to the FX (Foreign Exchange) markets, and so directionally FX markets may have to look at BoE (Bank of England) Governor, Andrew Bailey’s comments to the Fed’s Jackson Hole Symposium on Friday. It is unlikely that Bailey will enlighten markets as to his, or the BoE’s collective thinking on monetary policy.
All eyes on the surveys, as the EUR builds strength
Euroland was the outlier in terms of the provisional August PMI figures. Both the manufacturing and services readings dropped versus the final July readings, with the sharper drop in services activity likely to have been linked to the tougher restrictions placed on certain socialising places after the rise in new infections seen in Spain, France, Holland, Germany and, to a lesser extent Italy. The EUR tried higher again this week against the USD, but the fundamental data, and drop in risk appetite, scuppered the latest efforts higher.
There are some preliminary signs that the rates of infection in Spain are tailing off again, but it is too soon to tell in the likes of Italy, Germany and France. That could limit the extent of the recovery in September PMI figures as well, if, as one would expect, the authorities keep the renewed restrictions in place for some weeks to come.
After the slide in the PMIs last week, the focus for this week is likely to be on the German IFO (Information and Forschung / Germany’s Institute for Economic Research) for August. The surveys from Germany (ZEW - Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index) and Euroland (PMIs) haven’t been great lately, and the IFO, which is a survey of industrial firms, so far this year has been equally disappointing. The one bright spot of the preliminary August PMIs was the rise in the German manufacturing index, so will the IFO also surprise with a stronger set of outturns? Even if it disappoints, will it hurt the EUR, given that the markets have already seen the outturns from the provisional PMIs?
Consumer activity is the focus for the week ahead
Last week’s virtual Democratic National Convention saw Joe Biden formally selected as the Democrat candidate to challenge President Trump at the November election. That focuses the attention now on the end of September, when the first Presidential debates are set to take place. The President, Donald Trump, will be hoping that the data continues to point towards an economic improvement, and that the coronavirus infection rates continue to decline. There have also been suggestions that the Democrats and Republicans could agree on a smaller package of COVID relief measures, of around $500bn, omitting the areas of contention between the two sides.
Last week’s data and survey releases offered a mixture of news. The NAHB (National Association of Home Builders) housing market index for August, and July housing starts and building permits figures reported a significant improvement on previous outturns. In contrast, the August Empire manufacturing index, Philadelphia Fed business outlook index and latest week jobless claims data all worsened against the previous readings and were worse than consensus forecasts. The week was rounded off on a more positive note, with the provisional August manufacturing and services PMI outturns beating consensus forecasts and recording a significant improvement versus the July readings. The USD finished the week on a more positive note, but still remains towards the bottom of recent trading ranges.
This week is a busy one for US data and survey releases. Conference Board consumer confidence figures for August on Tuesday, revised Q2 GDP (Gross Domestic Product) figures on Thursday, and consumer spending (July) and University of Michigan consumer sentiment figures (final August) on Friday should be of greatest market interest.
However, whilst these will outline the ongoing evolution of the US recovery, or otherwise, what will be of particular interest is the Federal Reserve’s Jackson Hole Symposium towards the end of the week? How are central bankers altering their thinking with regard to monetary policy as the situation regarding the pandemic evolves? Fed Chair, Jerome Powell, headlines this year’s speeches, with most of the speakers delivering their speeches virtually for the first time.
Central banks will likely be in no hurry to tighten monetary policy, even if, over the coming quarters, the recovery continues. Given the lasting damage that has been done to some sectors and to the labour market more generally, ultra-loose monetary policy is here to stay.
Rest of the world
Unlikely loosening in the week ahead
Last week’s central bank meetings did not see any of those highlighted reducing interest rates, although there was some loosening on the periphery from the likes of the Namibian and Zambian central banks. Although the Philippines central bank did not cut interest rates, the continued strengthening of the peso, which now stands at over three year highs against the USD, could prompt a further interest rate cut at the next meeting.
This week, there are only the Israeli, Hungarian, Icelandic and South Korean central banks meetings, and none are expected to loosen policy, with rates very close to zero already. There will be interest in the Federal Reserve’s Jackson Hole symposium, detailed above, since this could set the tone for how the major central banks look to alter policy, and how the emerging central banks look to follow any adjustments.
To read the previous quick take, click here.