New beginnings for Sterling

Foreign Exchange

Good Morning, first and foremost, we would like to wish all our readers a happy, peaceful, and prosperous New Year.

After the most tumultuous year in living memory, the new year starts with two of the big clouds that hung over the markets gone as the US election and Brexit are now both finally resolved. Unfortunately, the news on COVID-19 infections continues to worsen and further lockdowns seem inevitable in the UK and Europe. Hopefully, as the vaccination programme expands, these restrictions will be short-lived, and some semblance of normality will return. As we start the year, the UK, the US, and the EU start on new journeys and how quickly they adapt to the changes will influence their respective currencies as will their recoveries from the pandemic.

Both the UK and the EU start the year as a freshly divorced couple but facing the same challenges. The change appears to have been seamless so far, but it is early days. After the relatively quiet markets of the last two weeks, traders return to their desks today full of vim and vigour for what looks to be an exciting start to the year with plenty of economic data to digest. The key as always will be the employment data out of the US. With the first full set of employment data for several weeks released at the back end of the week, we will see how the economy is faring as the pandemic continues across the States.

After a wild ride for sterling over the last five years the coming year should hopefully be less traumatic. With the last gasp signing of a trade agreement between the UK and the EU, a semblance of normality can now return and without the ‘no-deal’ risk premium hanging over it, sterling should continue to benefit. This week we have a relatively quiet start to the year on the data docket and traders may be more interested in whether tailbacks build-up at Dover as new regulations are implemented. Today, in common with the rest of the world, we have the Markit Purchasing Manager’s Index (PMI) for manufacturing to look forward to and on Thursday Construction PMI’s.

The euro has started the year trading above the $1.22 level against the dollar, which is more of a reflection of the continuing dollar weakness, rather than euro strength. The economy is still being hit by the second wave of COVID-19 and the restrictions that it necessitates, as a result, at present the eurozone’s growth prospects are not particularly strong. Against sterling, the euro is trading near to €1.1150 as traders eye the head start that the early vaccination programme could give the UK economy. On the data front, we have quite a busy start to the year. Today the Eurozone Manufacturing PMI’s are released, on Tuesday Retail Sales and unemployment for Germany. On Wednesday Services PMI’s are released across Europe. Also released are the German Consumer Price Index (CPI) followed on Thursday by Eurozone Retail Sales and CPI. The week closes out with German Industrial Production.

The dollar ended the year broadly unchanged on a trade-weighted basis, but this reflects its strength at the height of the pandemic last spring, more than any renewed buying interest. With a new, probably more predictable, President soon to be inaugurated, the Treasury’s actions will now be more in focus than ever. The appointment of the internationalist, Lael Brainard, as the next US Treasury secretary should lead to a less protectionist US that should see the dollar continue to ease. We have a busy data docket to watch this week kicking off with the Institute for Supply Management (ISM) Manufacturing index on Tuesday. On Wednesday, the Markit PMIs are released as are the last FOMC minutes and the first set of Employment numbers for the month with the ADP white-collar data. These are followed on Thursday by Initial Jobless claims and ISM services data. The week closes out with the often trend-setting all-encompassing Non-Farm payroll data.

Even though 2020 was anything but a normal year, the Swedish krona did behave as predicted and in-line with technical as well as seasonal patterns throughout December. The krona ended the year on a high note scoring its best performance and level against the EUR since February 2018 and claimed the title Best Performing G10 currency of 2020. January is historically speaking a month when the krona comes under pressure, and the gains from December are sometimes entirely wiped out. This week kicks off with the Swedbank PMI Manufacturing Survey out on Monday, and the latest figure for the Industrial Orders and Household Consumption is out on Friday. Please bear in mind that Sweden has a Bank Holiday on Tuesday for Epiphany (Three Kings Day).
What a difference a short sleigh ride across the snowy mountains makes. The Norwegian krone claimed the opposite title than the Swedish krona had bestowed upon it and officially became the worst performing G10 currency. Monday starts with the DNB PMI Manufacturing survey and Industrial Production figures are out on Friday. Norway and Demark will remain open on Wednesday.NE