Looking in the mirror

As the UK passes a monumental milestone of providing 15 million people with their first dose of a coronavirus vaccine, the predictable push for the government to start opening the UK economy is making newspaper headlines. In the US, Donald Trump has been acquitted in the latest impeachment proceedings, with the Democrats failing to achieve a majority large enough to secure a conviction.   

Last year, governments around the globe were convinced that the economic risk of a continued lockdown outweighed the risk of a viral relapse, in hindsight not the most prudent approach. The UK government is set to announce plans for the re-opening of the economy next week, emphasising that it will be an evidence-based approach which is cautious and irreversible, to avoid ever entering lockdown again. Whilst the vaccination progress is allowing the government to consider lifting restrictions, some Conservative politicians are being more vocal about bringing forward the reopening of the economy.

The UK’s economy hasn’t just been hit by coronavirus, but the added complexity of Brexit, which dealt a second blow to business certainty, employment, and is diminishing hope of economic recovery in the second half of the year. Just this weekend, the Financial Times examined a migration of shipping traffic away from UK cross-channel likes towards Irish seaports. This pattern reflects not only the red-tape cost of customs checks at the border but a 50% decline in UK/IE trade since the beginning of the year.

In the US Senate, the loss of a Republican majority has increased tribalism within the Republican Party and demonstrates one avenue Donald Trump’s post-truth movement may endure past his presidency. Trump has once again been acquitted in his second impeachment trial–this time of incitement of insurrection charges—despite seven GOP lawmakers voting with Democrats and a damning speech by Republican power broker Mitch McConnell.
 
Now that Trump's lost the Presidency and the majority, it might be surprising that so may Republicans still back him. This continued support could be because the pressure is on them, and they can go one of two ways. The first is to embrace Trump's populist style of politics that have worked only too well; the other is to move back towards a past version of Republican values, with some wanting to move away from Trump-style politics. Social media has changed politics, and Trump has essentially been the originator of that style, but it's been exceptionally effective at swaying voters in this digital age. In the short-term, backing Trump's tactics might be a way of quickly gaining the upper hand, whereas discovering what the Republican party stands for once again could be a longer process.
 
Bottomline: While some elements of the UK’s exit from the EU have shown to be favourable, the teething issues of Brexit could not have come at a worse time for the UK. However, there is the potential for the UK to make progress and leverage its new, independent direction, instead of continually focusing on UK/EU scorekeeping and one-upmanship. Given Boris Johnson’s tactics in 2016, it could be hard to see a change of tack from his administration.

The week ahead

GBP

The Pound surged above two-year highs on Friday and sustained positive gains for a fifth week in a row on expectations of a vaccine-led recovery. The rally has continued overnight as the UK hit the milestone of 15 million vaccinations. The R number has fallen below 1 (to between 0.7 to 0.9) for the first time since July, easing investor fears of a prolonged lockdown. However, this backdrop of optimism comes amid an economic decline—as UK GDP fell 9.9%—the country’s worst performance in over 300 years.

  • CPI y/y is forecast at 0.5% vs 0.6% previously, meanwhile Core CPI y/y is set to read 1.2% vs 1.4% last month.
  • Retail sales m/m look to be taking a hit due to the current lockdown measures with -2.6% expected, down from 0.3% last month.
  • Flash Services PMI look set to remain in contractionary territory at 42.3 vs 39.5 previously.
  • Flash Manufacturing PMI is forecast at 53.1 vs 54.1 last month.  

EUR

The story remains relatively unchanged in Europe as only 4% of the collective population have received their first dose of a coronavirus vaccine, when compared with 66% in Israel, 19% in the UK, and 13% in the US. This is despite statements from the President of the European Commission, who has pledged 70% of adults should be fully inoculated by the end of the summer. Even so, the Winter 2021 Economic forecast has displayed some cautious optimism, as growth for the Euro area is forecast to be 3.8% in both 2021 and 2022. In another sign of progress, former President of the European Central Bank, Mario Draghi, has now been sworn in as Prime Minister of Italy, and has gained coalition support.

  • Flash GDP q/q is set to remain unchanged at -0.7%.
  • French Flash Services PMI look to remain in contractionary territory at 47.0 vs 47.3 last month. Manufacturing PMI is forecast at 51.7 vs 51.6 previously.
  • German Flash Manufacturing PMI is likely to remain in expansion while the Services PMI is forecast at 46.5 vs 46.7 last month.

USD

Equities charged higher across the globe last week, continuing the downward trend in the US Dollar, making it the worst performing G10 currency in the past year. President Biden’s stimulus package continues to gather pace, with Speaker Nancy Pelosi doubling down on her timeline to get the legislation approved in Congress by the end of February. The extra fiscal stimulus is thought to be coming at the right time as it echoes the Biden administration’s coronavirus vaccine response efforts. The US markets are closed today as the country celebrates Presidents’ Day.

  • Retail Sales m/m are forecast at 1.1% vs -0.7% previously, meanwhile Core Retail Sales m/m look set to post gains at 0.9% vs -1.4% last month.
  • FOMC Meeting Minutes will take place this Wednesday.
  • Unemployment gains are released on Thursday, forecast at 760K vs 793k last week.
  • Both Manufacturing and Services PMI’s look set to remain in expansionary territory at 58.8 and 57.8 respectively.

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