Global Growth Looks Positive Despite Rising Covid Cases

GBP

The pound made gains of 0.4% against the dollar this week but lost 0.7% versus the euro as markets try to price in the everchanging effect of Covid on the global economy. The economic data released for the UK last week showed that the economy is recovering well as restrictions get lifted. Retail sales smashed expectations increasing to 5.4% versus a prediction of 1.5%, showing that the public are ready to spend the cash they have been sitting on for the past year. As this economic recovery has already been mostly priced into the Pound its unlikely to drive it higher but offers strong support for Sterling.

There is no such data to help support the pound this week as a very light data calendar lies ahead. Instead, markets will be following worldwide Covid cases which are ever increasing as well watching for new variants which may ruin the UK’s vaccination program. Analysts are predicting that the 1.40 level will be tested yet again this week on GBP/USD but whether it can sustain above this key level is another matter and most likely come down to the Fed on Wednesday. Versus the Euro, expectations are that the currency pair will generally drift sideways with a little upside potential for the Pound.

USD

The dollar was the worst performing G10 currency last week as the fallout from the bond market can now be said to be officially over and without demand as a safe-haven the Dollar had nothing to cling to for support. The Dollar index is well on its way to retracing two thirds of this year’s high with analysts predicting this to continue. The inflation induced dollar weakness now looks to continue for round two. The US equities markets struggled at the back end of last week after Joe Biden announced his plan which will nearly double taxes on capital gains to 39.6% for people earning more than $1m. On the data front, Manufacturing PMI’s came out better than expected and initial jobless claims were lower than expected.

Unlike the UK the US has a busy data schedule this week with Q121 US GDP growth which could be as high as 7% quarter-on-quarter annualised as well the Fed’s interest rate decision. No change in rate is expected from the Fed but a continued Dovish tone is expected from Jerome Powell. The trillions of Dollars spent by Washington this year are likely to mean the U.S. grew strongly last quarter though given the Fed has pledged as part of its average-inflation-targeting strategy to keep interest rates near zero for some time yet, that is unlikely to help the greenback this week. This week will also see Joe Biden’s first speech to a joint session of Congress, where further news on tax hikes are expected.

EUR

The Euro was the second best performing G10 currency last week only losing out to the Canadian Dollar. EUR/USD finished the week touching 1.21 after IHS Markit’s Flash PMI surveys of the Eurozone’s services and manufacturing sectors scaled record highs for April, lifting EUR/USD to a hat-trick of weekly gains. The EU spending plan also took a step closer last week after Germany’s Karlsruhe constitutional court has allowed the ratification of the EU fiscal stimulus plan to proceed. The ECB was a non-event for the euro with exchange rate comments failing to stand out but should allow for further upside in the future.

Q121 GDP will also be in the headlines for the Euro this week but even though its likely to contract and cause a second technical recession within a year its unlikely to affect the euro. This is because markets are feeling confident about the future growth of the Eurozone which has been backed by improving investor sentiment toward Europe, which comes amid a decline in new coronavirus infections, rising vaccination rates and a raft of better-than-expected economic figures. Data wise, Eurozone inflation for April is released on Friday expected at 1.6% versus a previous reading of 1.3% which should start to put pressure on the ECB to start tapering their weekly PEPP purchases.