Good Morning, today is lunar New Year
The celebrations for Chinese New Year slowed the currency markets last week as many traders were side-lined by the festivities, but it didn’t slow the pound’s progress which saw it consolidate recent gains above the $1.3750 level. The continuing success of the UK vaccination programme is still the primary influence and overshadowed the burgeoning spats with Europe, which are now focusing on the provision of financial services and the Northern Ireland Protocol. Away from the preoccupation with vaccination rates, investors continued to worry whether inflation is starting to take hold of economies; consequently, interest rates are edging up. As rates move up, they tend to drag currencies with them. So far, the move’s primary beneficiary has been the dollar as traders eye a more rapid recovery there than elsewhere.
Gradually, the market is starting to look away from the damage that the pandemic has caused and as it does hospitalisations and vaccine rates will become less critical and macro-economic data will again be the primary driving factor. Politics, away from the Eurozone, is also now less influential, and the impeachment of Donald Trump has been a sideshow. In the week ahead, we will know whether the fears of inflation are overcooked with the release of sales data in the US which empirical evidence on January spending from credit and debit card transactions infers will be a healthy number. In the UK we will also be watching out for the latest inflation data and hopefully further good news on vaccinations which will continue to support the pound at these higher levels.
UK
It looks like the UK will miss a double-dip recession despite last Friday’s official figures reporting the worst annual drop in GDP for three hundred years. The statistics also showed that the recovery had slowed sharply in the previous quarter. Still, with the country in a national lockdown for most of the time, this was hardly surprising. With the R rate now at its lowest level since last July investors are becoming more optimistic as is the pound which has opened strongly this morning at $1.3875 and €1.1465. This week’s data is all about the consumer who is the crucial component of recovery. Sterling is already anticipating better times ahead when optimists expect the pent-up demand built up over the last year to be unleashed as the country is released from lockdown. Both politicians and economists forecast a mini-boom that could encourage an uptick in inflation. Sadly, the fear is that unemployment will act as a cap as will the possible rises in taxation. This week we will get a glimpse of whether the market is getting ahead of itself on inflation fears when the Consumer Price Index is released on Wednesday. The only other figures of note are the January Retail Sales and preliminary Purchasing Manager’s Indices, both released on Friday. Comments from David Ramsden’ who has oversight of markets for the Bank of England, may stir some interest when he speaks on Wednesday.
EU
Mario Draghi was announced as Prime Minister of Italy last week, which has taken some political pressure away from the euro. Still, Ursula Von der Leyen, President of the European Commission and the upcoming elections in the Netherlands on March 17th ensure a modicum of uncertainty. Last week, the euro regained some ground that it had lost against the dollar and has opened at $1.2140. This week we will watch the vaccination rates, and we also have a busy few days on the data docket starting today with the latest Eurozone Industrial Production figures. Tomorrow the market in euros should become more volatile with Eurozone GDP and Employment released and the newest ZEW surveys from Germany. Thursday we will be watching Consumer Confidence in Europe and on Friday, in common with the rest of the world, Purchasing Managers Indexes are announced. The European Finance Ministers are meeting on Tuesday, and there is an ECB report released on Thursday when Isabel Schnabel, from the ECB, is slated to speak.
US
With the US shut for Presidents Day today and China still celebrating its Lunar New Year a sluggish start to the week is anticipated. The stock markets closed, yet again at record highs on Friday whilst the dollar stayed under a little pressure as traders tidied their books for the long weekend. Last week the dollar struggled to recover strength as traders remained worried by the jobs market and the seeming snail’s pace of the Joe Biden’s $1.9tln Stimulus bill through the law-making progress. However, with Donald Trump cleared of impeachment over the weekend the legislative calendar in the US Congress has unexpected space that should enable it to push ahead more rapidly with passing the bill into law, in turn driving the pound higher. On the data front, the highlights this week will be the latest Retail Sales and Industrial Production data on Wednesday. We will also be watching the Purchasing Manager’s Indexes on Friday. Released on Wednesday are the minutes from the last Federal Open Market Committee meeting which should confirm Jerome Powell’s dovish stance.
Scandi
The Swedish krona was the most volatile G10 currency last week. It ended the week higher against most other currencies and neither the Riksbank’s rate decision nor Governor Ingves’ press conference carried any surprises for the markets. As things are brightening up with rumours of countries exiting lockdowns come spring, beta currencies such as SEK are posed to gain further ground. The krona remains most analysts’ favourite funding currency and has a chance of benefitting further from any risk-on appetite. This week is thin from a macro perspective, and some parts of the country have started their mid-term holidays. The latest CPI figure is released on Thursday and is expected to come in at 1.5% on a Year-On-Year basis.
The Norwegian Krone is the best performing G10 currency so far this year. The inflation figure came in at 2.5% which will only further strengthen Governor Olsen’s warning that a rate hike to control prices from increasing too fast may be on the cards earlier than the markets anticipate. The GDP figure pointed to strong growth too, beating even the most optimistic surveys. This week sees no major data releases.