BOE and FED in the Spotlight

GBP

The pound managed to recapture some of the losses it sustained the week before last as it gained by 0.3% and 0.6% against the euro and dollar, respectively. Though the US bond market failed to settle as we saw another blow out on Friday, sterling managed to make overall weekly gains despite a difficult end to the week. GBP/USD tailed off by over half a percent on Friday afternoon as investors left riskier currency such as the pound and looked for a safe haven in the dollar, GBP/EUR was largely unaffected. The optimistic outlook for the UK economy continues to support the pound on the hope that consumer habits will return to normal by June.

The Bank of England MPC meeting on Thursday will be the main driver for the pound as talks of when the central bank will look raise interest rates have now become common place, a remarkable shift from the panic of negative rates entertained just a couple of months ago. No change in policy is expected this week but questions of whether 2022 or 2023 will see the first rate hike in the following press conference will influence the pound. Sterling should also see gains as the bond market should look to settle next week, if not serious questions will be asked about the Fed. Data wise, it is a quiet week apart from the aforementioned interest rate decision.

USD

The dollar continues to find itself in precarious position as longer-term inflationary pressures mount against the currency versus the shorter-term demand driven strength caused by investors looking for a safe haven from the volatile bond and equity markets. On the topic of inflationary pressure to the US dollar, Joe Biden signed off his $1.9trn relief package into law which includes a $1,400 stimulus cheque for individuals. Biden also looks to step up the vaccine program in order to get schools and businesses reopened as quickly as possible. Data wise, CPI was released slightly lower than expected both YoY and MoM.

The Fed meeting on Wednesday continues the theme of important central bank meetings this week. Markets will be most interested in the Fed’s new quarterly projections where 2021 GDP will likely be revised higher from the 4.2% median in December. Jerome Powell is expected to continue his rhetoric of the Fed having a long way to go before reducing stimulus and should stop the dollar from gaining to much strength. Questions will also be asked on the bond market but its unlikely that Powell has changed his stance since his interview with the Wall Street Journal a couple of weeks ago. The US will be meeting with China in Alaska on Thursday ahead of an annual US report to Congress on Friday detailing security implications of the US economic relationship with China. On the data front, retail sales are expected to drop off due to the lack of stimulus check compared to the month before and the cold snap is expected to impact February’s industrial production.

EUR

EUR/USD spent the whole week below the key 1.20 level, this is the first time since late November that this has occurred. Though the euro did manage to gain on the dollar with the most notable move coming off the back of the ECB meeting on Thursday announcing that they will be bring forward bond purchases previously scheduled to take place later in the year as part of its quantitative easing programme. The decision ensures accommodative “financial conditions” amid a global bond sell-off that has lifted borrowing costs for many countries, and as the continent scrambles to ramp up its so far bottom of the league vaccine programme. Data wise, GDP YoY slightly beat expectations at -4.9% as Europe struggles to generate any meaningful growth.

This week has started poorly for Europe as politicians are being forced to take the unwelcome step of renewing lockdowns as the recent spike in Covid-19 cases points to a third wave coming through this spring. This will hit the euro as lockdowns through the second quarter will continue to delay any signs of economic recovery. Local German elections on Sunday looks to the set the tone for the national elections in September and a heavy defeat for Merkel’s CDU party could briefly upset the EUR next Monday. On the data front, CPI is released on Monday and is expected to match the previous reading of 1.1%.