The pound had a mixed week, gaining 0.3% against the euro but weakening 0.9% against the dollar. The FX markets have been extremely volatile over the last week due to several factors influencing the markets. Sterling went through what looked like a corrective phase versus the euro dropping to a 20-day high mid-week before hitting a fresh 2 year high. This was caused in part by vaccine argument between the UK and the EU, at first it looked like the EU was yet again going to try and block the export of vaccines out of the single market thus slowing the potential economic recovery which hinges off its quick vaccination program. This now looks to have been put to bed for a second time, but it would not be a surprise if it were to happen again. On the data front it was mixed for the UK with January unemployment dropping more than expected, while inflation inched lower (to 0.4%) in February against market consensus.
Many analysts are predicting GBP/EUR to take another step up this week as the gap between the UK and EU forecasts widens further. With 29 million adults now vaccinated at least once in the UK including all adults in the high-risk category meaning the UK stays on track to vaccinate all adults by July. Against the dollar it will be more difficult to stage a recovery unless global markets start to settle but is still expected to appreciate in the long term. There are two speakers from the bank of England this week, Saunders and Tenreyro but they are not expected to stray from the banks current policy. Only data of note for the UK is GDP on Wednesday expected at 1%.
The US dollar was top performing G10 currency last week as it gained a minimum of 0.6% and up to 2.4% against it peers. The reason for the strong dollar move has been further risk off sentiment in global markets as well as the block in the Suez Canal starting to affect oil prices. Powell continued the Fed’s rhetoric of not changing monetary policy until they see inflation over 2% during his two speeches early in the week. Data wise, durable goods came out slightly worse than expected at -1.1% but GDP beat expectations at 4.3%.
Joe Biden will be back in the headlines this week as he announces his $3trn infrastructure plan. This will be much tougher to get through congress than the stimulus package and markets will be watching to see if corporate or wealth taxes are announced alongside. Progress on the Suez Canal will be followed closely as the knock effects start to be felt by industries around the world due to the supply side issues. Data wise: Wednesday sees ADP Employment expected at 525K; Thursday brings ISM Manufacturing PMI expected at 61.3 and Nonfarm payrolls on Friday expected at 630K.
The euro had a difficult week against the dollar as it fell to a 5-month low. The main driver for this move was the increasing number of infections on the continent paired with the low number of vaccinations. Europe is now facing a third wave of infections and with governments struggling to contain the virus as well as keep public relations strong, this can be shown by Merkel’s U-turn on an Easter lockdown. The economic outlook for many of European countries in which tourism makes a large part of the economic has been downgraded as a second summer looks to be cancelled. Data wise, Markit PMI Composite for March was released above expectations and just in expansion territory.
Coronavirus will continue to be the main driver for the euro this week as markets pay close attention to see if lockdowns will be able to slow the rising case numbers and if the EU are able to speed up their vaccination program. The economic contrast between the UK and EU can already be seen as the ECB have had to bring forward their pre-planned purchases of government bonds under its quantitative easing programme to prevent Eurozone yields rising in line with global counterparts. Further measures may have to be taken if Europe continues to struggle though there is not much firepower left for ECB. Only data of note for Europe this week is CPI released on Wednesday expected at 1.2% slightly up from the previous reading of 1.1%.
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