A sunny tone
Last week we saw yet another sequence of positive economic releases driving the market higher into the stratosphere. In fact, the only real shady patch in the otherwise sun-soaked markets was the miss on global industrial production measures. Given that Purchasing Managers’ Index data—which sounds the opinion of purchasing managers on the state of the economy—has been holding up pretty well, it makes a pessimistic outlook a rather niche view. Even those—like us here at the Global Reach Trading Desk—who talk about exorbitant assets prices had little to pick apart in last week’s performance.
The key takeaway from last week might be a rather nuanced pivot in central bank communication, coming out of the Federal Reserve and then the European Central Bank. The Fed meeting indicated a resumption of the patient—some might say dovish—tone which is waiting for persistent inflation to materialise, rather than acting preemptively, like some members of the Federal Open Market Committee have proposed. In Europe, the discussion is also adopting a more dovish tone. The European Central Bank President suggested that an unwind of stimulus is a way off and hinted at an extension of quasi-fiscal pandemic emergency purchase programme measures when they expire in March.
Lastly, one headline that caught our attention this morning and is shaping up to become a larger driver of asset allocation, and consequently currency valuations, is the escalation in US/China regulatory one-upmanship. Those who thought a Biden presidency would result in a détente in Sino-American trade tensions have instead witnessed a transformation of this animus into a more formalised policy stance by both sides.
Bottom line: Looking forward this week, we’re likely to see more key central bank contributions to the inflation vs stimulus tension staked out by the Fed and ECB last week. Peripheral to that direct communication, we will also get a first peek at US employment and inflation data that might contribute to this narrative. Also rather important, Chinese data on Thursday morning will help establish how the country’s slowdown narrative—signalled by the Caixin PMI early last week— is aligning to valuations in the coming weeks.
The week ahead
It was another mixed week for Cable, as the pair traded mostly rangebound after some midweek losses before recovering on Friday. The pair has remained relatively unchanged since the start of the month; however, Bank of England Governor Andrew Bailey has expressed his expectation that economic output shortfalls could be closed by the end of the year, which may provide support to the Pound. Sterling strength appears to be contingent on inflation remaining elevated, consumer spending continuing at a similar pace, and improvements in the labour market. All of which will help force the BoE’s hand to taper monetary policy.
- UK Consumer Price Index y/y is expected to read marginally higher at 2.2% in June compared with 2.1% in May.
- BoE Monetary Policy Committee member David Ramsden is due to speak on Wednesday at 6:00PM.
- The UK Unemployment Rate is forecast to come in at 4.7% for May, unchanged from the reading in April.
- Michael Saunders of the MPC will be shedding light on the UK inflation outlook this Thursday at 11:00AM.
The Delta Coronavirus variant is causing major issues in Europe, with travel being affected and restrictions being reintroduced in bars and restaurants. The Netherlands has reported an 800% uplift in cases last week; however, with vaccinations moving quickly and more second doses being delivered, it’s hoped hospitalisations will stay low. Elsewhere, European Central Bank President Christine Lagarde has hinted forward guidance is likely to change in the next ECB meeting on the 22nd of July. Keeping monetary support in place for longer appears to be the objective with the President dismissing the idea of tapering, placing bearish sentiment on the Euro.
- German and French final CPI m/m for June will be out on Tuesday with both countries expected to remain stable from levels in May of 0.4% and 0.2% respectively.
- The Economic and Financial Affairs Council (ECOFIN) will meet on Tuesday, with meetings taking place all day.
- French banks will be closed on Wednesday in observance of National Day.
- Eurozone Industrial Production m/m is forecast to come in at 0.2% in May after April’s 0.8% reading.
The US Dollar Index settled to levels of around 92.0 at the end of last week. The latest FOMC minutes suggested that inflation could be more persistent than first thought; however, early discussions on tapering were mentioned. Coronavirus vaccinations have begun to slow in the US, with millions reportedly not opting to take the jab. This has left some states open to a spike in cases and with the emergence of the Delta variant, health experts are beginning to grow concerned. Unfortunately, hospitalisations have nudged 6.8% higher in areas where vaccine uptake has been below average. It’s a busy week for US data with Retail Sales looking to bounce back sharply along with some key talks from Fed Chairman Jerome Powell.
- US CPI m/m is forecast to nudge lower to 0.5% in June from 0.6% recorded in May.
- Producer Price Index m/m also looks set to come under some control, predicted to come in at 0.6% in June, having printed at 0.8% in May.
- Federal Reserve Chairman Jerome Powell is set to testify multiple times throughout this week in Washington DC.
- Core Retail Sales m/m are forecast to recover, adding 0.4% in June from -0.7% in May. Retail Sales m/m have also improved although still look to remain in negative territory at -0.5% in June compared to -1.3% in May.
If you'd like to discuss your foreign exchange requirements with one of our currency specialists, call us on +44 (0)20 3465 8200.