FX Market Shrugs Off Indian-Variant Concerns


MARKETS GENERALLY REMAIN RANGE BOUND The mood in markets this w eek has primarily been ‘risk-on’ with the majority of equity indices recording gains albeit modest ones. Overall, however, it is hard to avoid the conclusion that markets are generally still range bound as they wait clarification of key issues such as the strength of the economic rebound and whether the recent rise in inflationary pressures w ill indeed prove ‘transitory’ as central banks are insisting. In particular, US Treasury and UK gilt yields are close to last Friday’s levels despite fluctuations during the week. Currency markets are also mostly little changed although sterling is higher on the week against both the euro and the US dollar. Markets so far appear to be shrugging off concerns about the recent rise in Covid19 cases as the so-called Indian variant spreads. In the UK, the news that new cases are 20% higher than a week ago may have had little market impact because so far that has not translated into a significant rise in hospitalisations, which implies that the vaccine programme is proving effective. That suggests the timetable for an end to restrictions in England on 21st June is still on course. Nevertheless, the hospitalisations data in particular, will be watched closely in the coming week. The UK government is not due to confirm that the 21st June loosening will go ahead until 14th June but w e may still hear something before then if the numbers deteriorate.


CENTRAL BANKS MAINTAIN DOVISH RHETORIC

Some reports attributed this week’s ‘risk on’ mood in markets to dovish comments from central bank policymakers, which have generally said they remain unconcerned by the current ongoing rise in inflation and, as a result, an early shift in monetary policy towards a less easy bias is unlikely. US Federal Reserve speakers have mostly been vocal in this regard. A minority of Fed policymakers have suggested that it might soon be time to start talking about tapering asset purchases but the majority have echoed Fed Chair Pow ell’s position that this would be premature. With the US dollar already weak, the Fed’s rhetoric may also be constraining other central banks, as a move toward a more-hawkish bias ahead of the Fed risks fuelling a further rise in their currencies. In the coming week, only the Australian central bank (Tue) is set to deliver a monetary policy update, although other announcements are set for later this month. The next European Central Bank update is due on 10th June follow ed by the Fed on 16th June and the Bank of England on 24th June. Consequently any central bank that intends to make near-term policy adjustments, and wishes to signal that beforehand, now has only a limited window . G7 central bankers and finance ministers w ill also get together in London next week after meeting online this week.



US PAYROLLS EXPECTED TO PICK UP

The monthly US labour market report is almost always watched closely by markets as a key bellw ether of US economic conditions and Friday’s seems likely to be no exception. Last month’s April update reported a low er-than-expected monthly employment rise and an unexpected increase in the unemployment rate. How ever, other indicators – including very big fall in jobless benefit claims in recent months – suggest this was an aberration. Consequently, w e look for a much bigger rise in employment of 875k in May and a fall in the unemployment rate to a new post-pandemic low of 5.8% (from 6.1% in April). Other timely updates in the US include the ISM manufacturing and services numbers for May. Both are forecast to print rises keeping them both w ell above the 60 level that would historically be consistent w ith strong economic growth. In the Eurozone, May CPI w ill probably be in focus next w eek ahead of the ECB’s policy meeting the w eek after. Eurozone inflation has been rising of late and a further increase is expected in May (Tue). Indeed, already released French data show ed a rise to 1.8%y/y from 1.6% previously. Analysts expect annual Eurozone headline inflation to rise to 1.9% from 1.6% in April. That would be its highest since November 2018 and broadly in line with the ECB’s inflation target of close to but below 2.0%. How ever, the rise is almost solely due to higher energy prices as the core measure (excluding food & energy) is forecast to still only be 0.8%y/y from 0.7% previously. Consequently, the data may reinforce the convictions of many ECB policymakers that they are still not close to achieving their target on a sustainable basis. Eurozone PMI data for May are also out next w eek (Tue & Thu) but these are second readings that are not expected to be revised. Those first estimates were consistent with expectations that, after a fall in Q1, Eurozone GDP will rebound in Q2.



UK PMIS POINT TO A STRONG REBOUND

Next week’s UK data calendar is light. PMI manufacturing and services updates for May are also second readings that are not expected to be revised from their first estimate. Those readings showed both measures above 60 for the second month in a row , a level historically consistent with strong growth. Less positively , the surveys also continued to point to concerns about inflationary pressures with some evidence of recruitment difficulties now adding to the previous comments about supply chain bottlenecks and higher commodity prices. The construction PMI for May is a first reading. That may decline modestly for the second month in a row but it is likely to remain w ell in expansion territory. Finally, the Bank of England’s money supply and bank lending data for April will be watched for signs of the impact from the extension of the temporary reduction in stamp duty on the housing market.


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