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What’s happening with currencies this week? Neil Parker, Market Strategist shares his views.
Trade talks linger, and sterling under scrutiny as Q2 comes to a close
Last week saw the pound under pressure, even as the provisional June PMI (Purchasing Managers’ Index) figures for manufacturing and services pointed to further improvements with both readings stronger than expected.
In the absence of any other significant news, the GBP was undermined by comments from Michel Barnier and David Frost, the EU and UK trade negotiators. Barnier indicated that the UK would have to compromise if it wanted a free trade deal, with more flexibility on fishing rights, the European Court of Justice’s jurisdiction to resolve disputes, and standardisation of tax, state aid and labour rights. Frost flatly rejected an EU demand that, if the UK changed its taxes then the EU will have the right to levy tariffs, again emphasising the lack of progress made on the trickier elements of the free trade deal being pursued by both sides.
This week’s most important figures for markets are likely to be the final releases of June manufacturing and services PMIs on Wednesday and Friday respectively, which could record a further uptick in activity versus the provisional readings. Ahead of these, are the final June GfK (Gesellschaft für Konsumforschung / Germany’s Society for Consumer Research) consumer confidence figures, due overnight on Monday, and the final Q1 GDP (Gross Domestic Product) figures due on Tuesday. Neither of these are likely to demonstrate much by way of any improvement, and nor should they affect the GBP. Indeed, this week will prove important in terms of how the GBP finishes the quarter. A poor finish could risk further short term weakness to come for the GBP.
Recovery lagging, but EUR fights on
Euroland saw further improvements in the surveys last week, but still a drag on current activity versus expectations. This week sees the final June PMI figures for manufacturing and services. The preliminary surveys pointed to France leading the way out of lockdown.
This week also sees preliminary June consumer price inflation figures for Euroland also released, but otherwise the surveys and data releases look relatively secondary in terms of market importance. The EUR remains on the defensive against the USD, and short term its performance into the quarter end may provide insight into the short term risks for the EUR more generally as we enter the second half of 2020.
Job count remains the focus despite tightening lockdown
Some US states had to re-introduce some tougher lockdown and quarantine restrictions last week as the number of new coronavirus infections spiked, reaching fresh highs towards the end of the week. The data and surveys were broadly better than expected, although the progress in the US labour market remains slow, with still elevated numbers of new jobless claims submissions.
This week the focus is on Friday’s release of US non-farm payrolls for June. Two numbers will be closely watched. Firstly, the headline payrolls figure - will this have improved again, after May’s surprise 2.5m net increase? Secondly, what will the revisions look like? June consensus expectations sit at a net gain of 3m jobs in June. That would still mean over 15m fewer jobs than in March. Could the payrolls data outperform? Possibly, but the surprise for markets will be lessened after the shock of May’s numbers. The USD’s recovery has been at the expense of risk appetite, will that continue?
Rest of the world
More central banks meeting, where will monetary policy loosen?
In the rest of the world we have central bank meetings from the Dominican Republic, Colombia, and Sweden this week. The Dominican Republic and Colombia have room to loosen monetary policy further, and with the spike in cases in Central and Latin America seen recently, both of these central banks could cut interest rates by up to 50 basis points. As for the Riksbank of Sweden, no change in policy is expected, with interest rates already at zero, and the bar for returning to negative interest rates is high, especially with Sweden having implemented far less stringent lockdown restrictions.