No more short-sightedness

This week may start on a quieter note, but a reduction in coronavirus cases in the UK is creating an incentive that favours short-term thinking and perhaps endangers long-term recovery. At the same time, the debate over US stimulus efforts continues, as newly appointed Treasury Secretary, Janet Yellen, begins to lobby for the $1.9tn package put forward by the Democrat-controlled House of Representatives. 

Setting aside the worrying complication of additional virus strains in the UK, reported virus cases have been falling gradually since the beginning of the year. However, we are still seeing around 10 times the number of cases reported in mid-2020, with approximately 16,000 new cases a day versus around 1,500 in early June. For its part, the EU cases are exhibiting a nearly identical pattern to the UK, hovering around 65,000 versus 7,000 in June. The US is seeing a sharper decline in cases over the past several weeks and is only reporting about 4 times their June 2020 rates. Asia pacific, viewed as a whole, is reporting less than twice their June rate, which is promising. 

Obviously, this sort of comparison is imperfect at best because testing capacities in many countries have improved drastically since the early months of 2020. It has been argued that the progress made in UK testing capacity has been understated, especially when comparing the lack of testing available in the early months compared to the start of this year.

Although confidence is building, the government is aware that they need to act more conservatively when they reduce lockdown this time round, as a relapse this spring would be catastrophic not only for the country, but economic recovery too. So far, the government has managed to stick to some of the deadlines it set in its timetable for lifting restrictions and lockdown. However, there is the concern that a decline in cases could cause them to act rashly and reduce restrictions earlier, rather than wait them out.

This year seems to be shaping up as the year for ex-central bankers to enter the political sphere, although this is not all together surprising. Former President of the European Central Bank, Mario Draghi, is forming a government in the squalid turf-war which is the Italian senate. Similarly, Janet Yellen, former Fed Chair of the Federal Reserve, has been appointed as President Biden’s Treasury Secretary. Yellen is now lobbying for the passage of the $1.9tn fiscal stimulus bill, which much of America is said to be in support of. The question is, will some of that Fed candour persuade newly-conservative Republicans to venture left in the reconciliation process, between Senate and House versions of the spending bill. According to Yellen, the House version could mean a return to growth in summer 2021 versus late 2022.

Bottom line: The temptation is to pounce on the positive news, but we’ve been here before. There is a very real possibility that improvements in the infection rates results in support for a faster return to ‘normal’ life and spoils all our progress once again. There is a similar risk in the US that the fiscal stimulus bill could fall from the top of its agenda due to too much spotlight on falling infection rates and the back and forth between the Houses. The big question is whether world leaders have learnt their lessons and can continue to work towards long-term objectives for the good of their countries, rather than focus on smaller positive signs.

The week ahead

GBP

The main focus for Sterling last week was the Bank of England (BoE) meeting. As monetary policy remained unchanged, what took the market by surprise was the optimistic growth outlook which detailed that pre-pandemic levels of growth should be attainable in late 2021, reaching those levels fully by 2022. In addition to this, BoE member, Dave Ramsden, mentioned the possibility of tapering asset purchases later in the year with the central bank on course to complete its programme by the end 2021. This news has acted as a tailwind for the Pound, as the UK reaches a milestone of 12 million coronavirus vaccinations.

  • BoE Governor, Andrew Bailey, is due to speak at the Mansion House dinner in London on Wednesday.
  • Preliminary GDP q/q is due on Friday, forecast at 0.5% compared to 16% in the previous quarter.
  • Also on Friday, Industrial production m/m is forecast at 0.5% versus -0.1% last month, while Manufacturing production is forecast at 0.5% versus 0.7% last month.

EUR

European Central Bank President, Christine Lagarde, has said that although the Eurozone’s recovery from a recession induced by Covid-19 has been delayed, we should see a slow recovery beginning in the middle of the year. However, a return to pre-pandemic levels of economic activity will not return until mid-2022. When compared with the UK & US, Europe’s Covid-19 vaccination campaign is still lagging, adding pressure to the common currency. As an economic recovery looks a long way off and the possibility of another interest rate cut is heightened, investors are moving away from the Euro to the Dollar, thanks to the US vaccination efforts.

  • Italian Industrial Production m/m is forecast at 2.1% compared with -1.4% last month.
  • German Final CPI m/m is forecast at 0.8% versus 0.8% last month.
  • French Industrial Production m/m is forecast 0.4% versus -0.9% last month.
  • The EU economic forecasts for member states over the next 2 years are due this Thursday. 

USD

Non-Farm Payrolls came in worse than expected last week, indicating a possible slowdown in the US economic recovery. Monetary policy looks set to remain relatively unchanged after the Fed pledged to increase its holdings of treasury securities by at least $80 billion per month, until the maximum employment and price stability goals have been met. Tapering down bond purchases anytime soon looks unlikely, as Fed Chairman, Jerome Powell, has stated that “the whole focus on exit is premature.” However, as coronavirus cases begin to fall and the vaccination campaigns begin to take effect, the road to economic recovery is looking more hopeful. 

  • CPI m/m is forecast as 0.4% unchanged from last month, meanwhile Core CPI m/m is forecast at 0.3% vs 0.1%.
  • Crude oil inventories are scheduled for release on Wednesday.
  • Fed Chairman, Jerome Powell, is due to speak on Wednesday.
  • Unemployment claims are forecast at 775K versus 779K last week.

If you'd like to discuss your foreign exchange requirements with one of our currency specialists, call us on +44 (0)20 3465 8200.