Client Newsletter - 29-03-21

Written by: David Comber
Date posted: 29.03.21

Much of the market data released last week was focussed on the UK and the Eurozone, but over the other side of the Atlantic, testimonies from Jerome Powell (Chairman of the Federal Reserve), also caught the attention.

GBP has now closed lower than it opened against the Dollar in four out of the last five weeks. This might not sound significant, but for the sixteen weeks prior to that, sterling gained in fourteen of them. The tables have well and truly turned for GBP-USD of late but is it all going to be one way traffic? Probably not.

A lot of the focus in the US recently has been regarding bond yields and inflation. Powell continues to paint a positive picture about the recent rise in long-term bond yields, suggesting they reflect the growing optimism about the prospects of the US economy, which was enough to support the Dollar throughout the early part of the week. Inflation is still an area for concern.

Vaccination rates are still a major factor, with the UK now having administered over 30 million first doses. This equates to 54% of adults and puts the UK third globally by percentage behind only Israel and the UAE. Step one of unlocking the country starts today, with the “stay at home” message being eased and some businesses able to reopen. The USA too is still vaccinating at an incredible rate (7th globally), now having administered over 128m doses, coming in at 34% of the adult population. These figures are arguably as important as any economic data releases at the moment.

Such is their importance, that sterling suffered off the back of the UK’s latest row with the EU about vaccine supply. After a brief harmonious period between the two parties of late, we saw threats from the EU regarding potentially blocking vaccine exports. As per the above, the UK recovery and subsequent boost to sterling are so dependent on the current vaccine supply, that GBP fell back early on in the week against the single currency as shown below.

The releases in the UK came thick and fast, with the mixed bag of data another factor in sterling’s fall during the early part of the week and recovery in the latter. Tuesday morning was unemployment, and whilst the furlough scheme extension is definitely helping keep unemployment at 5.0% (better than was expected), the number of people claiming benefits saw an increase. This is probably a sign of things to come and caused some GBP negativity.

Wednesday morning provided inflation data, with February traditionally a good month. But the pandemic created an unexpected drop which was largely attributed to lower prices for clothing and second-hand cars. Expectations are still for the figure to go above 2% later this year. Manufacturing also beat estimates, but the same could also be said for the equivalent German, French and overall Eurozone data released shortly before the UK figure. Retail sales completed the week in line with expectation.

With the slowdown in vaccine supply to Europe and cases there on the rise again, the potential for further lockdowns in France, Germany and a host of other major countries could well harm the Euro over the coming weeks. Germany had an Easter lockdown announced for a whole 24 hours, before it was retracted by Angela Merkel.

Elsewhere, Turkey’s president Erdogan fired his central bank governor after he opted to raise interest rates to keep control of inflation. The move caused concern in the markets as the Lira lost 15% in a day! This is the third sacking of a central bank governor in the past two years by Erdogan.

Onto the week ahead now and with an Easter-shortened week in many countries and month end, there is a lot of chance for volatility. In terms of data events, Friday’s Non-Farm Payrolls figure is the standout for this week. With Friday not being a bank holiday in the US but in many other countries, the data could be even more significant as liquidity levels in the market will be lower. The trend over the last few months has been incredibly positive for US jobs, so expect a strong figure on Friday afternoon. Anything less could weaken the Dollar considerably.

First thing on Wednesday morning we have the final GDP figure for the UK with expectations for 1.0% growth for the quarter ending December. This is released alongside house price data, with recent buoyancy in the housing market possibly slowing down according to some reports. Thursday sees a raft of manufacturing data for the UK, Eurozone, Canada and the US to take us into the Easter weekend.

Whilst economic data releases are light, focus will still be on coronavirus figures for clues as to ongoing recoveries of the respective major economies. Europe looks likely to be heading for a third wave according to recent infection figures, which could see GBP-EUR push through the resistance levels we have seen lately. Euro sellers should be aware of this and look to capitalise on current levels either using spot contracts for immediate requirements or forward contracts for future ones.

In the US too the case figures seem to be on the rise again despite the immense vaccination programme there, so there is potential for further Dollar weakness to come shorter term. With the assistance of the stimulus package, we still expect to see the Dollar gaining against most majors over the coming months, especially the Euro. But the next few weeks could favour Dollar weakness.

President Biden is also set to lay out a $3 trillion “American Rescue Plan” for infrastructure and education. Some economists are concerned though that this could lead to further problems for inflation (don’t tell President Erdogan of Turkey)!

For anyone with trades to carry out this week, Wednesday being the month (and quarter) end is something to be aware of. Banks and traders will be closing out positions and taking profits. There is potential for this to favour the Dollar after recent gains but that is not necessarily set in stone. What we can say is that it will be a volatile day so moving prior to the event would be wise.

Just a reminder that the Aston offices will be closed from this coming Friday to Monday for the Easter weekend. We will be back in the office on Tuesday morning. Enjoy the Easter break!