Risk-On: Sterling Up


US equity markets reached new highs on expectations that a new Biden administration and Democrat-controlled Congress will lead to significant additional fiscal stimulus. President Biden has proposed an additional $1.9tn on top of the $900bn package passed by Congress late last year. Treasury Secretary nominee and former Fed Chair Janet Yellen urged lawmakers to “act big” on the next fiscal package. There remains some uncertainty, however, on the degree of pushback from Republicans and also whether Trump impeachment proceedings will divert attention in the Senate. The broadly positive risk tone continued to weigh on the US dollar relative to other major currencies. Market sentiment was more mixed in Europe, with many countries announcing or indicating that containment measures to combat the virus may be tightened or could remain in place for longer. Germany, for example, confirmed that lockdown measures will be extended until at least mid-February. The rollout of vaccines in EU countries is also lagging behind, with less than 2% of people in Germany and France receiving at least one dose, compared with over 4% in the US and more than 6% in the UK (chart 1). The ECB this week reaffirmed that the Eurozone economy is likely to have contracted in Q4 and that restrictions will weigh on activity in Q1, hence the economy may experience a technical double-dip recession.


In the UK, over 5 million have been vaccinated and the target remains to inoculate the top four priority groups by mid-February. There are indications from the government, however, that Covid restrictions may prevail for longer than previously envisaged and that relaxations will occur only very gradually amid concerns about the new variant. Reports suggest that PM Boris Johnson wants the current lockdown to be the last. This week’s January UK ‘flash’ PMIs made for slightly sobering reading. The services business activity index fell more than forecast to an 8-month low of 38.8, while the manufacturing index remained in growth territory (above 50) but declined nonetheless to 52.9. In fact, the output subindex in manufacturing (equivalent to the services number) fell to 50.3, with respondents blaming a “cocktail of Covid-19 and Brexit” factors. But it is not all doom and gloom. The PMI survey provides further evidence that the impact of restrictions on the economy will be less severe than compared with the first lockdown last spring, because businesses and households have adapted. The forward-looking business expectations component of the survey also improved for both manufacturing and services (chart 2), as the vaccination rollout will support the eventual lifting of restrictions. Meanwhile, fiscal policy, aided by lower borrowing costs, will continue to provide a bridge to better days. There is speculation that the furlough scheme may be extended again, which would help limit rises in unemployment, while support for firms should minimise permanent closures of viable businesses and prevent broader economic scarring. The expectation is that policy measures will bolster prospects of an eventual strong economic rebound. Next week sees the release of November labour market statistics (Tue). We anticipate a rise in the unemployment rate to 5.1% in the latest three months, still a relatively low level given the scale of the fall in economic output. A timelier gauge of the economy will come from the Lloyds Business Barometer (Fri), which will give an update on economic optimism and trading prospects. It will also provide details on how businesses are feeling about Covid restrictions and vaccinations and the extent of disruptions to EU trade.


In the US, aside from prospects of fiscal stimulus and focus on the new administration’s broader policies, the FOMC (Wed) will deliver its monetary policy verdict, which will be followed by the release of the first estimate of Q4 GDP (Thu). After rocketing by 33.4% in Q3, we expect annualised GDP growth to slow to ‘only’ 3.8%, led by weaker services activity. Nevertheless, we believe the Fed will look through signs of slowing or stalling near-term economic activity in anticipation of acceleration later in the year. At the same, Fed Chairman Powell will continue to play down talk of ‘tapering’ of bond purchases as premature. The Eurozone focus will remain on concerns about the slow rollout of Covid-19 vaccines and the impact that will have on the economy. The ECB left policy unchanged this week, as widely expected, having already added significant stimulus last month. As noted, the Eurozone economy may experience a doubledip recession, with contractions potentially in both Q4 2020 and in the current quarter. Germany, France and Spain will all release first estimates of Q4 GDP (Fri).

Analysts think Germany may just have avoided contraction with a flat quarter-on-quarter out-turn, helped by a relatively robust manufacturing sector. Covid restrictions in France and Spain, however, are likely to have resulted in economic contraction. It is worth noting that German January CPI (Thu) will jump higher because of the reversal of the temporary VAT cut and also higher energy prices. That should bring Eurozone CPI out of negative territory, but domestic price pressures remain subdued and overall inflation will remain below the ECB’s goal.

To discuss how the above may affect your money transfer requirements, please contact your Currency Dealer at Heritage Pay on +44 (0) 207 117 2934.

None of the information in this article is, nor should be construed as, financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.

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