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Can the pound sustain its rally?
The markets finally woke up to the fact that the Federal Reserve will no longer bail the stock markets out with easy money after Jerome Powell’s speech last Tuesday.
Having constantly warned participants that the Federal Reserve was serious about rapidly increasing the cost of borrowing, the penny finally dropped, and Wall Street led the rest of the world’s stock markets sharply lower. The falls initially had the impact of pushing the dollar higher, but by the end of the week, the money leaving riskier assets sought the safe haven of US bonds and yields eased. As yields eased and fears of a recession grew, the dollar pulled back. Sterling had an eventful week with what some saw as an MOT of financial data for the UK economy published. The figures revealed that the jobless rate is at its lowest level for nearly 50 years; however, wages are rising to add to fears of an income spiral that will fuel already high inflation. Price rises were a smidgen easier than forecast whilst consumer confidence was much lower. At least the great UK shopper is doing their bit, helping Retail Sales be more robust than expected!
This week the UK has a well-deserved rest from being the centre of attention for economic data, but the pound may well stay at the forefront of traders’ minds. After a good bounce last week, the momentum has continued this morning. However, Boris Johnson is not entirely out of the woods over partygate despite avoiding the embarrassment of a further fixed penalty notice for Covid lockdown breeches. The long-awaited Sue Gray report will be published this week and may embarrass him and the government further. The ongoing problems with the Northern Ireland Protocol are also starting to worry the markets, and with a trade war threatened, sterling may begin to lose some of its newfound shine. The key events in the coming days look to be centred around US data and the minutes from the last Federal Reserve meeting. With volatility still at heightened levels, it seems sure to be yet another week where we witness larger and more unpredictable currency movement than usual.
GBP: A wild week for sterling ended with it rallying strongly, which it has continued to do this morning. It is now over three cents better against the dollar and nearly a cent better against the euro than a week ago. With the economic data released last week pointing toward a period of stagflation and potential political upheavals in the background, it is somewhat surprising that sterling has performed so well. It may be explained by traders and investors being overly short of the pound, as was evidenced by figures released for the derivative markets last Monday. The statistics revealed that traders such as hedge funds were unusually four times shorter of sterling than they were long. The only significant data releases are the preliminary Purchasing Managers Indexes for Manufacturing and Services tomorrow morning. The services element will be the most closely studied, with consumer confidence collapsing as the cost-of-living crisis takes hold.
EUR: Last week, the euro dragged itself off the floor after more hawkish than expected minutes from the last European Central Bank meeting were published. The single currency was also helped higher by statements from ECB council members, the most noteworthy comments coming over the weekend from Christine Lagarde, who said the first rise in rates for over ten years might come in July. Earlier in the week, Klaas Knot had said that a .5% rise was not out of the question, although that still seems unlikely. During the week ahead, there will be plenty of opportunities for policymakers from the ECB to air their views starting tomorrow with Christine Lagarde again. On Wednesday, Fabio Panetta, Klaas Knott and Phillip Lane are all slated to take the microphone. This week is relatively light on the data front, the highlight being the Purchasing Manager’s (PMI) reports on Tuesday. Last month’s figures beat expectations, especially in the services sector. With consumers worldwide pulling their belts in the Service PMI will be watched closely to see whether the same is happening in the EU as Summer approaches. Much of Europe celebrates Ascension Day on Thursday, a public holiday, most notably in France and Germany. This morning as this note lands in your inbox Ifo will release its surveys on German business conditions, which are expected to have worsened slightly over the last month.
USD: Just as it looked impregnable, the mighty dollar backed down last week as fears over an impending recession took hold in the US. Wall Street and the stock markets finally realised that the Federal Reserve will not come to investors’ rescue until inflation is out of the system. As the attractions of holding riskier assets, such as shares, waned, the appeal of government bonds increased, forcing yields lower, making the dollar less attractive. This week, the only significant data releases for the G3 currencies are in the US. The data week starts tomorrow with preliminary Purchasing Managers Indexes and New Home Sales released. Durable Goods orders are scheduled for Wednesday, First Quarter Gross Domestic Product (second estimate), and the weekly jobs data are on Thursday. On Friday, the Federal Reserve’s favoured measure of inflation, the Personal Income and Spending report, including the core Personal Consumer Expenditure deflator, is published. Also scheduled are the minutes from the last FOMC meeting, which will almost certainly confirm the prospect of two .5% rate increases at the June and July meetings. There are plenty of speakers from the Fed who are expected to carry on with their hawkish rhetoric starting this afternoon with Raphael Bostic; tomorrow, it’s Jerome Powell’s turn, and on Friday, possibly the most prominent hawk at the Fed, James Bullard.
The dollar continues to climb
Central Banks and their policy choices once again dominated the currency markets last week and will continue to do so as we edge closer to their next meetings.
With interest rates set to rise worldwide, speculation is rife on the quantum of the rises. The most aggressive stance is still being taken by the US Federal Reserve, which continues to say nothing to dissuade investors from anticipating successive increases of 0.5% at their next two meetings and, if some analysts are to be believed, possibly by more. The derivative markets are now pricing in no less than nine back-to-back rises of at least 0.25%. In contrast, the Bank of England is sounding almost dovish, and in the face of gathering problems for the UK economy, this may be prudent. Last but by no means least, even the European Central Bank is now hoping to raise rates by 0.75% by the end of the summer.
The euro initially bounced before giving back most of its gains on the news that Emmanuel Macron was comfortably re-elected on Sunday after gaining nearly 58% of the vote in the Presidential Election. With the French Presidential elections settled, a European embargo on Russian oil is more likely, which will cap any advance by the single currency. The week head is bereft of important economic data until the end of the week when inflation in the eurozone and GDP in the US is released. With a dearth of financial data, speculation over the war in Ukraine will play a more significant role in the markets, and the euro will be on the frontline as it feels the impact of slowing economies, dropping consumer confidence, and rising energy costs. Also fighting for attention will be the bond markets which, after a week of rising yields, may continue to undermine confidence in the equity markets, which could lead to a further search for safe-haven assets. All in all, a challenging week ahead for the euro and the pound was possibly made worse with month-end volatility exaggerating movements.
GBP
Friday’s poor set of retail sales data combined with falling consumer confidence was taken badly by currency traders who pushed sterling sharply lower against the euro and the dollar. It has started the week still on the back foot, having lost nearly two cents over the last seven days and is now sitting near its lowest levels against the dollar for 18 months. On reflection, the hesitancy of Andrew Bailey to be hawkish is understandable; however, the market still sees at least a 0.25% rise in base rate after next week’s meeting of the Bank of England’s Monetary Policy Committee. Whether the appetite is still there to increase the base rate by 0.5% is now open to debate, and this doubt has encouraged the recent sellers. Sterling’s sharp fall will also put pressure on the Bank of England as there is now a danger of importing inflation through a weakened exchange rate. Unusually it’s a barren week for macroeconomic data in the UK, which may not be necessarily a good thing. Attention may turn to Boris Johnson’s problems and his seemingly constant battle to stay as Prime Minister. Campaigning for the local elections, which take place on the same day as the Bank of England meets, will also start to hit the headlines, so we could be in for a nervy week politically, which may feed through to sterling. Tomorrow Sam Woods from the Bank of England is scheduled to speak, and his colleague Sarah Breeden will take to the rostrum on Thursday.
EUR
Despite President Macron winning a second term, the euro is still hovering around its lowest level for two years against the dollar. With the Federal Reserve set on raising the cost of borrowing next week and risk aversion continuing, the euro is likely to stay on the back foot for the time being. This week, investors in the euro can turn their attention back to raw macroeconomic data and the problems the European Central Bank faces. The problem for the ECB is how to start normalising policy and when to start doing so. This was brought into focus on Friday with ISMs Purchasing Manager’s Indexes release. During April, the services sector in the eurozone touched a seven-month high; however, manufacturing PMIs appear to be grinding to a halt. With manufacturing stuttering and inflation growing, it does appear that the eurozone is heading into a period of stagflation. The eurozone has the busiest data docket of all the major currencies this week, starting this morning with the release of the IFO Business sentiment reports for Germany, followed by EU Construction Output. We then have a couple of days without top tier data before Germany releases its preliminary Consumer Price Index and Eurostat publishes a plethora of data, the most important being Consumer and Industrial Confidence. A busy week closes with German and eurozone GDP and the EU Consumer Price Index. The only speakers due from the European Central Bank are Fabio Panetta this evening and Luis de Guindos on Thursday afternoon.
USD
The Federal Reserve looks nailed on to raise rates in a little over a week, by 0.5% and even if some are to be believed, 0.75%. This should continue to support the dollar, especially against currencies with more circumspect central banks. The prospect of the rise is causing risk assets to come under pressure in particular stock markets, which in turn is strengthening the greenback. A quiet start to the week on the data front is in prospect until Thursday when Gross Domestic Product is released, which is expected to have slowed from the last quarter as Omicron damaged the economy. However, if recent data is believed, this is a blip, and the second quarter GDP should bounce back strongly. Friday sees the release of Personal Consumption Income and Spending, including the April Index, which the Fed will be watching closely. Before that, Durable Goods are released tomorrow, and of course, the weekly jobs data is out on Thursday. There are no speakers from the Federal Reserve this week as they are in their normal blackout period ahead of their monthly meeting on 4th May.
Financial markets get the jitters
A relatively quiet week sparked into life last Thursday afternoon after the release of a slightly higher than expected Consumer Price Index from the US. At 7.5%, the index is at its highest level for over four decades, and worryingly the core figure is also rising steadily.
In response, yields on US bonds rose sharply, as did interest rate projections in the derivative markets. James Bullard, from the St. Louis Federal Reserve, reacted by suggesting that the cost of borrowing should rise by 1% between now and July and even suggested that the Federal Reserve could hold an emergency meeting and raise rates. This reaction smelt slightly of panic to the markets, and as would be expected, stock markets started to slide, pushing the dollar higher as investors searched for safer assets. Sterling fared better than the euro as expectations are that the Bank of England will again raise rates in March whilst the European Central Bank council members started to dial back their hawkishness.
With a quiet week ahead, at least for economic data, elsewhere attention will switch to the UK this week. With the next meeting of the Bank of England looming, the release of the UK’s inflation indexes this coming Wednesday will be studied with interest. With the increases in energy prices starting to come through into the numbers, expectations are for another jump. Elsewhere geopolitics will continue to unsettle the markets, with President Putin becoming increasingly belligerent over his intentions towards Ukraine whilst President Biden back peddles. Over the weekend tensions escalated with countries, including the UK, advising its citizens to leave Ukraine as fears of a Russian invasion grew. Elsewhere Brexit negotiations still rumble on, as do Boris Johnson’s domestic problems; however, a quieter week on that front with parliament on recess may be on the cards.
GBP
After last weeks inflation shock in the US, the UK takes centre stage this week with the release of both employment and inflation data. First up is the unemployment data, released tomorrow, which is expected to edge lower again to virtually pre virus levels. With markets now expecting further moves upwards in Base Rate at the Bank of England’s next meeting followed by another one in May Wednesday’s Consumer Price Index will be of some importance. Most analysts are looking for a slight drop in January’s headline figure but for it to bounce back and peak in April. If there is no apparent easing in the figure sterling could make further gains in particular against the euro. Also scheduled for release, but not quite as important as the CPI figure, are January’s Retail Sales which are published on Friday.
EUR
The euro was buffeted by the storms that crossed the Atlantic following the release of the US Consumer Price Index and the responses from the mouthpieces of the Federal Reserve. Christine Lagarde’s attempts to soften her hawkish rhetoric of the previous week unsettled the markets, as did the hawkish comments from the new President of the Bundesbank, which highlighted the frictions inherent in the European Central Bank’s council. Contradictory speeches were also delivered by Phillip Lane and Isabel Schnabel leaving the ECB in a catch 22 situation. As well as its internal problems, investors are also nervous about European assets as the temperature continues to rise between NATO and Russia on Europe’s Eastern border, keeping a lid on any advances by the euro. The only data of note due this week was out tomorrow when Employment and Gross Domestic Product for the Eurozone published and the ZEW sentiment surveys for the zone and its constituent countries. However, there are some notable speakers who will have a chance to give more clarity to the ECB’s position. The first opportunity falls to Christine Lagarde today and then Isabel Schnabel has a chance to reiterate her hawkish credentials and Phillip Lane his dovish ones on Thursday.
USD
With minimal top tier data release out of the US this week, the dollar’s direction is likely to be driven by the continuing fall out from last week’s Consumer Price Index. Financial markets are looking for now looking for a rise in rates at the next Federal Reserve meeting on 16th March. The derivative markets are suggesting that there is a better than 50/50 chance of a .5% rise to be followed by at least another four hikes through the rest of the year. However, there is another set of inflation figures released before that meeting and the markets and consequently, the dollar may have got ahead of itself. On Wednesday Retail Sales will be watched for any further signs of weakness that they have shown recently but with the effects of the Omicron variant still evident, some softness may be expected in them. The only other top tier figures scheduled for release are for Industrial Production, also on Wednesday, and the weekly jobless total on Thursday. Away from data, the market will be studying the minutes from the last FOMC meeting, which are released on Wednesday evening, to see how concerned the Fed really is over inflation.
Scandinavia
Despite a somewhat hawkish Riksbank, the market expected even stronger language from Governor Ingves making the Swedish krona weaken further. It reached levels last seen in early 2020 on Thursday. Focus this week will be on the situation in Ukraine as any talk about military action could potentially have a negative impact on beta currencies such as the krona. On Friday, the latest CPI figures are released and will be closely monitored by market participants. Over in Norway, the country is preparing for ex-Prime Minister and current Head of NATO, Jens Stoltenberg to take over the helm at Norges Bank. Given the previous political affiliation of Herr Stoltenberg, some questions have been raised in regards to his fitness for the role. This week the latest GDP figure is released on Wednesday.
Will dollar continue to dominate?
Last week the markets were dominated by the strength of the US dollar, which took sterling down to nearly three cents off September’s highest level, with the euro also giving up a similar amount.
Flows into the dollar were encouraged by the rise in yields on US treasuries and it’s safe-haven appeal as equity markets came under pressure. Much of the move was caused by the quarter-end rebalancing of portfolios, which created more volatility across all asset classes than has been the case recently. The dollar was also pushed higher as currency derivative traders in the options market were caught out by the speed of the moves and had to rapidly hedge positions.
The market enters the fourth quarter of the year in a suitably nervous mood. Many brokers will remember the stormy weather and equally turbulent markets that led to the stock market crash in October 1987. This month tends to be tricky for equities, and with the world’s financial markets intertwined, the currency markets can also be volatile. Policy tightening in the US now looks imminent, possibly as soon as November if this week’s employment data is reasonably strong.
Also of interest will be the outcome of today’s OPEC+ meeting. With global energy supply problems, threatening to push inflation higher, traders will be keeping an eye on whether they turn on the metaphorical taps. Finally, as always, politics will play out in the background both in Germany and closer to home, where an under pressure Conservative Party will hold its annual conference.
UK
Worries early last week over the possibilities of 1970’s stagflation reappearing in the UK combined with quarter-end pressures and pushed sterling sharply lower against the dollar. It recovered some ground during the week but remains at the mercy of King dollar. It fared better against the euro ending the week unchanged. With The Governor of the Bank of England hinting at a rate rise before the end of 2021 and the money markets looking for three rate hikes next year, sterling should continue to hold its ground against the single currency and possibly grind higher. This is not to say that there are no problems on the horizon for sterling. Energy supplies are causing concern due to a lack of storage facilities for natural gas and, almost unbelievably after last weekend’s weather, a lack of wind to turn turbines. The Conservative Party conference takes place this week, and this may present the government an opportunity to put their case over Northern Ireland and trigger article 16. Macroeconomic data is pretty thin on the ground, with only September’s final Composite Purchasing Manager’s Index (PMI) released tomorrow, which may just have fallen back from August’s 54.1. The Bank of England is scheduled to release its Quarterly Report on Friday, and the Bank of England’s hawkish Dave Ramsden speaks on Tuesday.
EUR
The euro had a tough week dropping quite sharply against the dollar, which was no surprise considering the European Central Bank’s (ECB) dovish stance over inflation. It was also damaged by the risk-off mood permeating the markets. Whether the ECB is still relaxed over inflationary pressures after September’s headline figure touched 3.4% will become apparent with speeches scheduled this week from Christine Lagarde and Phillip Lane, both of whom are doves. As discussed last week, the horse-trading over who will lead Germany is now in full flow and looks set to continue for several months to come with a Green/Socialist coalition looking the most likely outcome. Tomorrow Eurostat will publish Europe’s Producer Price Index, and Markit will release their Composite PMIs for the Eurozone and the countries that constitute it. On Wednesday, the EU’s Retail Sales are reported; this Thursday, Germany will release their Industrial Production data, and the ECB will publish the minutes of its most recent meeting.
US
Moves in the stock market and risk sentiment are likely to be the dominating factor at the start of the week as we wait for the latest employment statistics from the US Labor Department on Friday. Despite China remaining shut all week for holidays, the market’s worries over Evergrande are still bubbling under the surface, and equities may be volatile again. With speakers from the Fed starting to sound concerned over inflation, the stage looks set for a start to a tapering of QE next month.
If Friday’s Non-Farm Payroll shows new jobs in the region of 500,000, the market will take this as a virtual confirmation that policy will change sooner rather than later. Although now possibly in overbought territory, the dollar should continue to stay in favour as it continues to benefit from what is called the dollar smile. The smile reflects the dollar’s direction; one side points up when yields rise due to a strong economy, and the other side points up when the markets become risk-averse. By the end of the week, we will know if the dollar is grinning or grimacing.
The data week starts tomorrow when Markit releases its composite PMI and ISM publishes its Services PMI. The first of this week’s three employment reports are published on Wednesday, the ADP white-collar numbers, which will be watched more closely than usual for clues to Friday’s data. These are followed on Thursday with the weekly jobs number and finally, the big one, Friday’s Non-Farm Payroll.
Scandi
The Swedish Krona had a relatively quiet end to the quarter and remained stuck within the range it has been trading for most of 2021. The fourth quarter has historically been a krona positive month, and most market participants expect this quarter to be no exception. This week we will get the latest Industrial Order and the Household Consumption figures. Both are expected to show an expansion.
In Norway, the krone finished the month on a strong note and is at its highest level against the euro for the year but for a brief spell in April. The ever-increasing demand for oil and general shortages are certainly assisting, but the fact that Norges Bank raised interest rates should not be overlooked. This week we will get the GDP figure on Friday. The economy is expected to have grown 0.9%, an increase of 0.4% compared to last year.
A busy week ahead
Last week, the dollar put in its worst performance this year after the Federal Reserve meeting was perceived as less hawkish than analysts predicted. In actual fact, the Fed did say that “progress” was being made towards normalisation, but in a relatively quiet market, traders ignored the subtleties of language and decided to sell dollars.
The change in the market’s mood coincided with month-end, and institutions reversing their dollar positions to book their profits exaggerated the move down.
Along with most of the G10 currencies, the pound had its best week for some time and managed to gain nearly two cents to finish the month near the top of its trading range. The reluctance of the Fed to start tightening policy became more understandable after the release of second-quarter Gross Domestic Product showed that the economy was not bouncing back quite as strongly as was previously thought. Indeed, the annualised Core Personal Consumption expenditure, one of the Fed’s chosen indicators, was lower than the consensus had forecast, justifying the opinion that inflation is a product of disrupted supply chains and is transitory.
There are two significant events on the currency market’s horizon dominating traders’ thoughts and actions this week the monthly meeting of the Bank of England’s Monetary Policy Committee (MPC) and a complete set of US employment reports, including the all-encompassing Non-Farm Payroll this coming Friday. With the Federal Reserve taking a patient stance over monetary policy, neither dovish nor hawkish, it will be a major surprise if the BoE chooses a different path. The chances are that sterling will ignore the BoE meeting unless there is a marked change in tone and tread water until the release of the Non-Farm payroll data on Friday, which is expected to show strong growth. Away from the macroeconomic data releases, we will be monitoring the Brexit-related problems in Northern Ireland and the spread of Covid in the UK and, as importantly, across Europe and the US.
UK
With the direction of Covid figures still unclear in the UK, it is unlikely that the Bank of England will dramatically change tack on its policies after Thursday’s MPC meeting. Although there are at least two hawks on the committee, judging by recent speeches, it still appears too early in the UK’s economic recovery for a majority of members to push for any substantial change of policy. However, according to press reports over the weekend, they may alter the sequencing of any future tightening. Unless the Bank is openly more dovish than after its last meeting, it is unlikely that sterling will react too dramatically. The Bank of England is also scheduled to unveil its updated quarterly forecasts on Thursday, which are expected to continue cautiously optimistic, but they may contain a sharp upward revision to their inflation forecasts. Ahead of the meeting, Markit will release their Purchasing Managers Index (PMI) for Manufacturing this morning and on Wednesday final composite and Services (PMIs) for July.
Euro
A very quiet week and possibly month looks in prospect for the euro, with many traders choosing a sunbed over a dealing desk as August arrives. With the main events occurring away from the continent and little economic data to be published, the euro’s direction will be led by primarily the dollar. Despite a solid performance that saw the single currency gain a cent against the dollar last week, it slipped against sterling after mixed European data with concerns over the effect of the Delta variant remaining to concern investors. As in the rest of the world, the Eurozone will see the release of Markit’s PMI’s starting this morning with Manufacturing followed by the Services and Composite sectors on Wednesday, which also has June’s Retail Sales scheduled for release. There is then a lull till Friday when Germany’s Industrial Output for June is reported
US
After a series of mixed data reports in the US, traders will be studying this week’s employment details, particularly Friday’s non-farm payroll intently. With the Fed willing to turn a blind eye to inflation and reluctant to pull the trigger on tightening until further progress towards full employment is made, this monthly report has assumed more importance than usual. There are still six million fewer Americans in work than before the pandemic; however, the US has an enviable record in creating jobs. If the actual number comes close to the one million new jobs created figure that some are forecasting, the dollar will appreciate sharply as expectations of an early round of tightening will resurface. The US labor department will also release its weekly jobless total on Thursday, and ADP will publish its predominantly white-collar employment report on Wednesday. As elsewhere, we start the week with Markit and ISM’s Manufacturing PMI’s this afternoon. This data is followed by June’s Factory Orders tomorrow and further PMI’s, including July’s final Composite index the day after. There are several speakers from the Federal Reserve this week, including Richard Clarida on Wednesday and Christopher Waller the following day.
Scandi
The Swedish krona finished the month unchanged against most G10 currencies. August is historically speaking a krona positive month, and seasonality (with people coming back from their holiday and schools reopening) plays a part too. This week kicks off with the PMI Manufacturing data, Wednesday with the PMI Services data, and on Friday, the Budget Balance is reported.
Meanwhile in Norway, people are preparing for the General Election in September, and politics may start to influence the krone. August has a mixed track record for the krone, whose value very much depends on the consumption of oil and people traveling. This week sees no major data releases but for the PMI Manufacturing data out today.
Currency markets look to Federal Reserve
Currencies continued to trade in the familiar tight ranges for most of last week as the markets awaited the US Consumer Price Index (CPI) for May, which, when published, reported the highest core inflation figure for 30 years.
Investors remain concerned with the inflationary pressures that appear to be growing as the developed world recovers from the pandemic and how quickly central banks will stifle uptick by tightening policy.
Initially, the dollar rallied before falling back and then rallying again into the close on Friday as the US Bond market belatedly reacted to the CPI data and yields increased. The pound was buffeted by these outside influences and has opened this morning a little easier than last week at $1.4100.
Another potentially busy week lies ahead with key data from the UK and the monthly Federal Reserve Open Market Committee (FOMC) meeting. After last week’s surprisingly high inflation report from the US, pressure has increased on the Federal Reserve to tighten policy. The markets will hang onto every word Jerome Powell says at the press conference following the meeting for any hints to a change in policy. There is an avalanche of reports from the Office for National Statistics (ONS) over the next few days for the pound to digest in the UK. In the background, as so often, there is an ongoing Brexit dispute with the EU rumbling on. The so-called “sausage wars “seem likely to continue into this week as the tricky issues of the Northern Ireland Protocol remained unresolved. Hopefully, the Euro 2020 tournament will be less contentious!
UK
The pound had a relatively quiet week last week but may become more vulnerable this week as the final easing of restrictions on the 21st June looks likely to be delayed and tensions between the EU and the UK show little sign of easing. However, as has often been seen, the EU likes to take negotiations to the last minute. So far, the impact of the dispute over the Northern Ireland Protocol has been muted, with sterling virtually unchanged against the euro in the last week at €1.1650. We have a data-packed week in front of us starting tomorrow morning when the ONS will release Average Earnings and hopefully Employment figures that are continuing to improve. On Wednesday, it’s the UK’s turn for CPI, which is likely to show a rise towards the 2% level whilst not rising as quickly as the US. The week closes out with May’s Retail Sales which several analysts expect to disappoint after April’s sharp rise. We will be listening to Bank of England Governor Andrew Bailey when he speaks tomorrow afternoon for any comments on the morning’s unemployment data.
Euro
As expected, at their monthly meeting last week, the European Central Bank played down any chances of tightening policy soon. Whilst not unexpected, the market turned against the euro, and some quite heavy selling occurred, which pushed the single currency to below $1.2100 against the dollar. It remained against sterling, but both currencies remain vulnerable to any breakdown in the ongoing talks over the trade issues surrounding Northern Ireland. An extremely quiet week appears to lay ahead with mainly second-string data on the docket apart from Eurozone Industrial Production this morning, German CPI tomorrow, and lastly, May’s CPI for the Eurozone on Thursday.
US
The highlight of the week for financial markets, generally not least the currency markets, will be Wednesday’s FOMC meeting. However, with the markets entering summer mode and volatility decreasing, it is unlikely that the Fed will want to rock the boat by discussing tapering; indeed, it is most likely that Jerome Powell will do all he can to avoid the subject at the press conference. Only two reports stand out on the data docket: May’s Retail Sales and Industrial Production, both of which are released tomorrow. The retail sales data may unsettle the markets as they are likely to be distorted by disruptions to the car market caused by the shortage of semiconductors. Away from financial data, President Biden will continue his travels this side of the Atlantic with what should be interesting meetings with President Putin from Russia and his Turkish counterpart President Erdogan.
Scandi
Even though macro-data came in worse than expected last week, the Swedish krona kept on strengthening confirming what many analysts had written earlier about its seasonal performance. We are now in official krona strong ground that usually lasts until Midsummer and sometimes until the last Riksbank meeting in July which is the last one until the long summer holiday ending in mid-August. This week sees no major data releases which means technical and seasonal traders may outnumber day traders looking for quick profits.
The macro data from Norway also provided some sombre readings last week, in particular the latest CPI figure which was much lower than expected. It prompted the financial press to seriously question whether a rate hike from Norges Bank Governor Olsen will come in September, some going as far as saying that the Norwegian krone now has become a two-way bet. Volatility against most G10 crosses is expected to remain high throughout the week until the Deposit Rate announcement on Thursday. The market expects Governor Olsen to stay put but will closely listen to what he has to say regarding last week’s low inflation figures during the press conference.
Is the US recovery stalling
After a week of anticipation, the non-farm payroll report came in at a slightly disappointing level and encouraged sellers of the dollar to reappear. With employment rising at a lower than expected 559,000, the pace of the recovery in the US and the subsequent tightening of economic policy is starting to be questioned by investors.
However, on closer analysis, the problem is not a lack of jobs but a reluctance to return to the workforce.
This hesitancy by workers is leading to a squeeze on wages, although there are nearly 8 million fewer people employed than at the start of the pandemic. This combination of factors presents the Federal Reserve and the currency markets with a problem. The market perceives that the Federal Reserve should be starting to tighten policy to control inflation but is boxed in until employment drops.
Looking ahead into this week, events are likely to be dominated by worries over a possible surge in Covid cases in the UK caused by new variants, inflation concerns, and the monthly meeting of the European Central Bank on Thursday. With new variants occurring and cases increasing, there have been doubts cast over the further lifting of restrictions on June 21st. Still, with most of the country’s businesses open, the damage caused by delay is more likely to be psychological and damage confidence. However, with travel restrictions increasing and the chances of a vacation abroad receding, the euro may become increasingly vulnerable as the southern European countries miss out for a second summer in a row on the UK holidaymaker boosting the local economies. The G7 summit meeting also takes place this week at Carbis Bay in Cornwall to discuss the world’s economic fightback.
UK
The pound flew the flag for the G10 currencies last week against the strengthening dollar and has opened this morning at $1.4140 whilst staying relatively strong against the euro at €1.1620. However, with the government’s Matt Hancock saying yesterday that they were “absolutely open” to delaying the next stage on the roadmap to normality and concerns over the efficiency of the vaccines, worries will start to mount about whether consumer confidence has returned too early. If these fears grow, sterling could well begin to drift lower as the concerns of a stagnant economy and rising inflation come to the fore. this week Andy Haldane is slated to speak, who is always thought-provoking and maybe more so than usual as he is soon to be free from the current constraints of his current role as Chief Economist of the Bank of England. On Friday, we will be studying how the economy is performing when both Industrial and Manufacturing data are released, along with a snapshot of April’s Gross Domestic Product.
Euro
The euro slipped against both the dollar and the pound last week and has opened at just above $1.2150 this morning for what is sure to be a busy week for the single currency. As with the UK, concerns are growing over the spread of the Delta variant across the continent and the impact that the travel restrictions that the UK has imposed on holiday destinations will have on the economy. We have a plethora of data to digest head of the monthly ECB meeting on Thursday starting tomorrow with the ZEW* Economic Sentiment indicators, German Industrial Production and Employment, Eurozone Employment, and its GDP. Wednesday is a quiet day with only regional data to digest, and on Thursday, the ECB meets.
* Zentrum für Europäische Wirtschaftsforschung – Centre for European Economic Research
US
The non-farm data was slightly weaker than expected on Friday, and immediate thoughts of tapering and tightening were returned to the back burner and with them the recent dollar strength. As a result, some analysts think that the greenback may now ease ahead of the next Federal Open Market Committee meeting on June 16th. However, it is unlikely to see too much movement before Thursday when alongside the regular weekly jobless claims numbers, May’s Consumer Price Index (CPI) is released. CPI is likely to show a rise towards 4.8%, its highest level since the early 1990s, and any substantial increase on that forecast rate will reignite the tapering debate. As usual, ahead of the monthly Federal Open Market Committee meeting, Fed officials are in speech blackout mode until after the next meeting on June 10th.
Scandi
Sweden celebrated its National Day on Sunday and last week saw the krona strengthen against the G10 currencies. However, it has so far been a quite lacklustre six months period for the Nordic region’s largest currency which was tipped to be one of the best-performing currencies of this year at the outset. Instead, it has been stuck in quite a narrow range throughout most of 2021. This week will get the CPI figures on Thursday, which are expected to come in at 2% on a year-on-year basis and a positive change of 0.4% month-on-month.
In Norway, the week kicks off with the Industrial Production figures for April this morning, and the CPI and PPI figures are released on Thursday. Inflation is expected to be on the high side, at 2.9%, but that would be lower than in the past four months. If worries about inflation cool off, there is a chance that the market might start questioning whether Norges Bank Governor Olsen will increase interest rates come September as widely is anticipated. This kind of speculation is behind the recent Krone weakness we have experienced.
Sunny start to the month for Sterling
Good Morning, with sunny weather week ahead, UK slowly returns to normality, the currency markets continued to worry last week about the impact of this on inflation and whether Central Banks will be too tardy in their response.
The Royal Bank of New Zealand and the Bank of Canada signaled their intentions to raise rates in 2022, as Dr. Gertjan Vlieghle, a Bank of England’s Monetary Policy Committee member, voiced his concerns. His comments helped sterling spike back towards $1.4200, the top of its recent range, even though his remarks were heavily caveated, However, with the markets shut for holidays yesterday, Friday became the de facto month-end, and rebalancing unsettled the dollar, and it has continued to weaken this morning.
As customary for the first week of the month, the data docket is dominated by the unemployment reports released throughout the week culminating in the all-encompassing non-farm payroll employment report on Friday. The euro has opened at $1.2220 this morning. The Eurozone releases its inflation data ahead of the European Central Bank’s next meeting on 10th June with the central bank prevaricating over their next steps.
UK
Last week, the pound put in a good performance against most of its peers, and this looks set to continue with its opening at €1.1640 this morning. It responded as we said earlier, to the comments from the Bank of England whilst ignoring the political fallout from Dominic Cumming’s testimony about the handling of Covid. London is gradually returning to work, and the comments from Andrew Bailey and his colleagues to the Treasury Select Committee of the House of Commons, on Thursday, will be followed closely for any signs of hawkishness as will his speech this evening. Apart from the testimonies, it is another quiet week for data in the UK apart from the final readings of the Purchasing Manager’s Indexes starting today with those from the Manufacturing sector and followed on Wednesday with Services
Euro
As with all economies, markets are studying inflation and employment data for clues to recoveries and subsequent tightening of rates. This week, it’s the turn of the Eurozone to publish their reports, starting today with the release of its Core and Headline Inflation data for May. After yesterday’s Consumer Price Index releases across the continent, these may surprise the upside. We will also be keeping an eye on German Unemployment data released as this hits your mailbox. The response from European Central Bankers is limited as they enter into a week-long verbal blackout from Thursday before their next council meeting on 10th June. Also released this week, the European Markit Purchasing Managers Indexes start today with their Manufacturing and followed with the other sectors during the week. Tomorrow sees German Retail Sales for April reported as well as April’s Eurozone Producer Price Index. Also released is a report concerning the euro’s international role, which should show the growing use of the single currency on the international stage and may add a little strength to the single currency.
US
After Personal Consumption Expenditure came in slightly higher than expected at 3.1% on Friday, there was some selling of US Bonds, exacerbated by the reports of President Biden unveiling a $6tln budget, leading to higher yields and making the dollar more attractive. It will be interesting to watch how the market trends this week ahead of the key non-farm payroll data released this coming Friday. The 266,000 jobs created in April disappointed the market the last time the figures were reported. This data set will be closely studied for anomalies as there seems to be demand for workers, with supply that is the problem. Before the Non-Farm data, ADP will release their private-sector employment report tomorrow, not always the most reliable indicator, and the weekly Jobless claims on Thursday. Apart from the unemployment data, the ISM business surveys are also out. A busy schedule of speakers from The Federal Reserve awaits us.
Scandi
The Swedish krona was pretty much rangebound against the euro, and there were no major movements despite data showing that wages increased by 0.1% on a month-on-month basis. Today we will get the Swedbank PMI Manufacturing data and, later in the week, the Current Account Balance and the Budget Balance. Most traders and market participants expect the delayed krona bull run to make steam this month after May turned out to be one of the least volatile months ever with movements within a 10 öre range against the euro and pretty much a 5 öre range against Sterling.
The Norwegian krone weakened throughout May, and its impressive bull run has been somewhat halted despite rumours about a potential rate hike come September. This week we will get the DNB PMI Manufacturing data followed by the Current Account Balance figure on Wednesday.
We would like to encourage our clients and partners trading with any of the Scandinavian or Nordic countries to start preparing for the month-long summer holiday starting after Midsummer. Should you wish to speak to one of our regional experts about how flows over the summer could be managed most effectively, reach out to your Account Manager or reply to this email directly.
Is inflation rearing its head?
Good Morning, in an upbeat end to the holiday-shortened week saw sterling (inflation) gain against the dollar above $1.4025, where it has opened this morning.
Several factors helped the pound rally; firstly, the Bank of England presented very upbeat forecasts for both the economy and the level of unemployment as the UK continues to ease successfully out of lockdown. Secondly, the Conservative party performed better than expected in the local elections. Thirdly the dollar fell quite sharply after Friday’s employment data was much worse than expected. Against the euro, the pound traded in a narrow range as the gyrations in the dollar market caused technical adjustments to pricing, and it has opened this morning virtually unchanged at €1.1550.
Over the weekend, election results continued to be announced including, those for both Scotland and London. As expected, London was held by the Labour party, but with a weaker endorsement than previously, and in Scotland, the SNP just failed to capture a majority, but this will not stop them from pushing for a second independence referendum. However, with Boris Johnson holding a strengthened mandate South of the border, he is likely to play hardball over the independence referendum. This week the market will be watching as tensions increase over the post-Brexit trade deal, which flared up into a confrontation over fishing off the shores of Jersey last week. Looking forward, we expect the market to carry on digesting last week’s events before the release of Gross Domestic Product in the UK on Wednesday. There is also a full data docket in the US to look forward to, including inflation as measured by the Consumer Price Index (CPI), which will be keenly watched as a sharp rise is predicted by some analysts.
GBP
After the excitement of the local elections, fishing disputes, and the Bank of England’s meeting last week, it looks like we have a slightly calmer time ahead. The only data of any real import being the announcement of both the Gross Domestic Product (GDP) for the first quarter. As the country has been able to return to its favourite occupation of shopping since lockdown partially ended, expectations are for a good figure. We will also watch the vaccination figures as we approach a further milestone on the roadmap to exiting lockdown the reopening of indoor entertainment next Monday, which will give the economy an additional boost. Alongside the GDP figure released on Wednesday, the latest Manufacturing and Industrial Production data will also be announced. Finally, the Bank of England could expand on last week’s economic forecasts when Governor Andrew Bailey speaks both tomorrow afternoon and Thursday evening. Increasingly his words will be studied for any sign of tightening as pent-up demand hits the economy causing fears of inflation to increase.
Euro
The euro has been performing well against the dollar and has opened this morning at $1.2150 against the greenback. Much of this gain came Friday afternoon after the Non-Farm payroll number in the US led to heavy selling of the dollar. Helping the euro strengthen is the feeling that Europe has now turned a corner in its fight against Coronavirus. Hopefully, it will be able to salvage its summer vacation period and, in doing so, revive its decimated service sector. It’s an extremely quiet week for data up ahead in Europe, and the US data releases will drive the direction of the euro against both the dollar and sterling. There is very little on the data docket this week, and much of Europe will be closed on Thursday for the Ascension Day Holiday. We will keep an eye out for the ZEW surveys on economic sentiment in Germany due tomorrow and its Consumer Price Index on Wednesday, but these rarely move the euro.
US
The Non-Farm Payroll numbers released last Friday were much lower than the consensus expected and resulted in an immediate and continued sell-off in the dollar as the US’s recovery miracle was called into doubt. In addition, the employment data supported the Federal Reserve’s policy of leaving rates lower for longer, encouraging the risk-on mood that took hold Friday afternoon. The dollar’s movements are likely to dominate the currency markets with a US-centric data-heavy week ahead. There are no major data releases due until Wednesday when April’s Consumer Price Index (CPI) is released, which is expected to show a jump to nearly 4% in the inflation rate, which will pressure the Federal Reserve to tighten policy. After the CPI data, it will be interesting how well received the issuance of $41bn 10-year Treasury notes is at the afternoon’s auction. On Thursday, the weekly jobless number is released, and on Friday, April’s Retail Sales and Industrial Production are published.
Scandi
The Swedish krona finished the week off on a strong note against most G10 currencies gaining more than 1% against the EUR on Friday. It was mainly buoyed by the poor non-farm figures rather than any Swedish-related macro data. Monday begins with the Housing Price Indicator for April, and Wednesday will see the latest CPI figure. The latter is expected to come in at 2.2%, 0.2% above the Riksbank’s target, and the first time in more than two years, it has reached these levels.
The Norwegian krone was mainly rangebound throughout most of last week with no significant data releases. Today the latest CPI figures are released and are expected to come in at 3.1%. Norges Bank has a target of 2%, which would further Governor Olsen’s case for a rate hike come September, we will also watch the GDP figures released on Wednesday.
Have a great week.
Synergy Team