Covid Variants Could Dampen Pounds Potential

GBP

The Pound was the top performing G10 currency last week, increasing by 0.8% against the Dollar and just under 1% versus the Euro. GBP/EUR closed the week just above 1.16 following its best week since February. Sterling benefited from an expiry of election related political risks, as well as first quarter GDP data that showed the economy contracting less than what was expected during the lockdown, at the beginning of the year. Though, new strains of coronavirus which could be less resistant to the vaccine are starting to worry the Government, as it could lead to a push back of a fully reopened economy come June 21st.

This week should yet again be positive for the Pound, as it takes advantage versus a weaker Dollar, as well as being helped by a busy economic calendar. Unemployment figures are released on Tuesday and are expected to decline to 4.9%. Wednesday sees CPI expected at 1.4% versus a previous reading of 0.7% and is expected to increase to over 2% later this year, which will put some pressure on the Bank of England’s policy makers. Then on Friday, April’s retail sales should rise (linked to the reopening of shops in April) and May PMIs should be encouraging as the economic outlook is improving.

USD

The Dollar managed to regain some ground last week versus most of its major rivals and only failed versus the Pound and Canadian Dollar. The main strength for the Dollar came after inflation jumped to more than twice the 2% target of the Fed for the month of April, when data was released this Wednesday. Inflation data appeared to prompt speculation that the Fed could cut back its quantitative easing programme or increase interest rates sooner than expected, leading to a rally by the Dollar and an increase in bond yields earlier this week. Retail Sales failed to match expectations of 1% for the month of April, as they were released flat at 0%.

This week is likely to be a tough week for the Dollar due to its light economic calendar, meaning the markets main focus will be on the FOMC Minutes released on Wednesday evening. The main takeaway from Jerome Powell at the previous meeting was ‘now is not the time to talk tapering’ and the minutes should continue to support the Fed’s rhetoric that they are unwilling to change policy until they see meaningful growth above the 2% target. The dollar is also likely to be sensitive to news of rising Covid cases in Asia as well as China’s retail sales disappointing slightly. If global trade looks likely to slow back down, then the Dollar may receive a short-term boost due to safe haven demand.

EUR

Last week the euro managed to weather the storm of strong US data, keeping above the key 1.20 level with ease. The two main drivers for the currency pair are firstly, the Fed committed to looking through the inflation spike and keeping US real rates very negative. Secondly, confidence is growing in the Eurozone recovery and markets are starting to wonder whether EUR real rates are right to be as equally negative. Begging the question, will the ECB have less tolerance of higher inflation than the Fed? On the data front last week, Industrial Production month on month for March came out lower than expected at 0.1% versus a target of 0.7%. In Germany, Harmonized Index of Consumer Prices equalled the consensus of 2.1%.

German politics will be one of the main talking points for the single currency this week, as the candidates to replace Angela Merkel debate on Thursday. Most recent opinion polls show that the Green Party still have a slight lead over the CDU/CSU. The Green Party economic policy will allow for a slightly looser fiscal setting and even more European integration which should be positive for the Euro. There are a couple of big speeches from Largade and Lane on Tuesday and Thursday, where the topic of Eurozone inflation could be discussed. Data wise, EU GDP is expected at 1.8% on Tuesday morning and Markit PMI is released for both Europe and Germany on Friday.