A difficult start to the New Year

Financial Services

Good Morning, the optimism that surrounded the start of the New Year quickly evaporated last week as the spread of COVID-19 worldwide started to concern the currency markets.

In the UK records of the worst type were broken as hospitalisations and mortalities both hit new records.

With another lockdown now enacted  London’s mayor, Sadiq Khan has declared a “major incident”. Concerns are now growing for the damage that the economy will suffer. With the mass vaccination programme currently underway, there is at least some light at the end of the tunnel, however tighter lockdown restrictions are being considered. Compared to mainland Europe, the UK is some way ahead of getting the population inoculated. This should help give the UK economy a head start compared to Europe when the recovery hopefully starts later this year and is lifting sterling against the euro.

Markets were also optimistic that Donald Trump would concede gracefully and leave the White House in an orderly manner. Instead, the world witnessed the turmoil in Washington, DC, last week. The market now wonders if there are any more twists in the tail to come and is becoming more risk-off. However, as much as Donald Trump dislikes the outcome, Joe Biden will be the next President, and the Democrats will control both houses making legislation easier to pass. After disappointing employment data showed that the US economy had lost another 140,000 in December, the incoming President knows that he faces plenty of economic challenges. He also has the tricky task of uniting a deeply divided nation.


Sterling suffered slightly last week as Boris Johnson instigated the third lockdown on the country. Questions were also raised concerning the efficacy of the developed vaccines against the newer strains of the virus. Of course, countering the doom is the expansion of the vaccination programme, which may enable the UK to swing out of the lockdown cycle faster than its competitors. Brexit has finally dropped off the front pages, and so far, there appears to have been a smooth transition, but the market will remain cautious of sterling to see whether there is a delayed impact. This week we have another quiet week on economic data with the highlight being November’s monthly Gross Domestic Product which is released on Friday alongside Industrial Production data. This afternoon Silvana Tenreyro, from the Bank of England, will deliver a speech titled “Let’s talk about negative interest rates” which may spook the markets and pressure Andrew Bailey to respond.


Europe is facing the same problems as the rest of the world as COVID-19 case continue to increase, and containment measures grow in response. The euro has been under selling pressure as the vaccine campaign appears to have started slowly epitomised by France vaccinating less than 150,000 compared to around 2,000,000 in the UK. With the more contagious strain of the virus now reaching into the continent, a third wave is becoming a distinct possibility. After a busy start to the year on data, this week is quieter with only Eurozone Industrial Production for November due out on Wednesday. The ECB’s Christine Lagarde is speaking both this afternoon and Wednesday and the minutes from the last ECB meeting are released on Thursday. We will also be watching the German CDU convention choosing Angela Merkel’s replacement as their leader.


After the maelstrom of last week, we will be hoping for a quieter time this week as Donald Trump enters the last days of his Presidency. Last week, US interest rates started to rise as the Biden administration is expected to introduce reflationary policies, and a change in risk sentiment has begun to be felt. As yields rise, the dollar becomes more attractive, and over the last week, sterling eased and has opened this morning at $1.3500. A relatively quiet week for data this week mainly focusing on what the US consumer has been doing. December Consumer Price (CPI) figures are out on Wednesday, and Retail Sales will be released on Thursday which is expected to disappoint. Google mobility data suggests people traffic in retail areas has been slow which infers less gift buying over the Christmas period. Several Federal Reserve members are speaking this week including Jerome Powell, Chairman of the Federal Reserve, on Thursday.


The Swedish krona was rangebound last week and the shorter working week meant that liquidity was very thin. This week is the first official week back at work, and new COVID-19 related restrictions have come into force, including face masks during rush hour on public transport and fines for anyone hosting a private event of more than eight people. The week kicks off with Swedish Housing Figures and the Budget Balance. Later in the week on Thursday we will get the Unemployment Rate, and on Friday the CPI figures are released. Inflation is expected to come in at 0.6% on a month-on-month basis.

The Norwegian krone has started the year strongly, which may be more technical than macro, driven. This is because Norway’s two major industries (oil and fishing) are still suffering from lockdowns and the absence of leisure and business travel. This week we start with the CPI figure out today and GDP figure tomorrow. The latter is expected to have contracted 1.6% on a month-on-month basis. The week finishes off with the trade balance being reported.