Vaccine Woes Give Sterling A Bloody Nose
STERLING SUFFERS BODY BLOW The week has ended on a sour note for the British Pound. It fell from a 1-year high of 1.1801 and touching the 1.1498 level on Thursday - a fall of more than 3 cents in less than a week. In FX terms this is seismic and comes on concerns that the AstraZeneca vaccine may cause blood clots amongst some people. While, the pound has recouped some of those losses, it is still languishing at much lower levels than it has traded this year.
VACCINE ROLL-OUT REMAINS IN FOCUS Markets continue to weigh up concerns about the speed of the vaccine rollout and fears of virus mutation, and a third w ave of Covid-19 cases, against hopes of a strong economic recovery. Over the past w eek, which w as holiday shortened in many countries, equities are up in the US and most European markets suggesting that a ‘risk on’ mood continues to prevail. Some positive economic data surprises, particularly in the US and the UK, and upward revisions to economic growth forecasts from the IMF may have helped boost sentiment. How ever, it should be noted that some equity markets in other parts of the world have fared less w ell. Meanwhile, government yields have edged down in both the US and UK possibly a sign that markets are gaining reassurance from central bank policymakers promises that a sustained sharp rise in inflation is unlikely and that monetary policy is set to remain very easy. How ever, that may be tested by the coming w eek’s US inflation data. In currency markets, possibly the most notable move of the w eek has been a sharp slide in sterling against both the euro and US dollar. Concerns about the Astra-Zeneca vaccine may have contributed to this weakness.
RESTRICTIONS IN ENGLAND TO BE EASED AGAIN
Monday 12th April will see a further easing of lockdown restrictions in England as nonessential retailers and some other consumer-facing businesses, including hairdresser, are allow ed to reopen. In addition, pubs and restaurants w ill be allow ed to serve customers outside. Government statements suggest that the next phase of loosening planned for 17 May also remains on course. There are already clear signs from a number of economic surveys that these moves are expected to produce a significant rebound in economic activity over the past few months. For example, in March the Lloyds Business Barometer, GfK consumer confidence measure and all three PMI indices (construction, manufacturing and services) posted significant rises. Most notable this week w as the construction PMI report, which noted activity rising at its fastest pace since late-2014 and cited evidence of the opening up of projects previously delayed by Covid-19.
UK GDP FORECAST TO BE UP IN FEBRUARY
However, while the outlook for the coming months looks positive, activity in early 2021 has been restrained by the latest lockdown. As a result of that, GDP fell by 2.9% in January albeit the decline w as less than expected and much smaller than last spring’s first lockdown. On Tuesday, February GDP data w ill be released. Restrictions w ere of course still in place for all of that month. Nevertheless, there are still signs of at least a small rise in output. We look for a 0.8% monthly gain reflecting a rise in services output more than offsetting drops in industrial production and construction activity. The latter two sectors seem likely to have been disrupted by supply chain problems. Even assuming a further acceleration in March, GDP for Q1 as a w hole still seems set to be down, possibly by around 2.0% from its level in Q4. Nevertheless, the expected uptrend through the quarter means that a sizeable rise seems possible for Q2.
Also of interest in the UK w ill be the March retail sales estimate from the British Retail Consortium (Tue). The official retail sales measure posted a disappointingly small rebound in February, following a very big fall in January. Nevertheless, given the ongoing improvement in consumer confidence it seems reasonable to expect sales picked up last month. How ever, even if sales w ere to disappoint again in March, a significant improvement is expected as restrictions are rolled back.
US INFLATION EXPECTED TO RISE
The coming w eek’s US data calendar is busy. Of most interest to markets - given concerns about a potential sharp rebound in inflation – is likely to be Tuesday’s March CPI release. The CPI is not the Federal Reserve’s preferred inflation measure. That is the consumer expenditure deflator but as that w ill not be out for another couple of weeks, the CPI w ill provide a timely update. The annual rate of inflation is forecast to jump to 2.5% in March from 1.7% in February largely on the back of higher energy prices. That would be consistent with a move in the Fed’s preferred measure above its inflation target. How ever, the ‘core’ rate is forecast to rise more modestly to 1.6% from 1.3% in February. The Fed has been predicting this inflation rise and sees it as temporary and not something that requires a policy response. Fed speakers next w eek are likely to reiterate that view and confirm that the data w on’t induce a near-term change in monetary policy.
Most US activity data in February surprised on the downside reflecting unexpectedly severe weather in the south of the country. As a result of that, and the ongoing acceleration in US economic growth, big rebounds are expected in the coming w eek’s March updates for housing starts, industrial production and retail sales. Retail sales may also be lifted by initial effects from the Biden fiscal stimulus package that w as passed in March and so w e look for a 4.5% monthly rise.
In the Eurozone, already released data for some of the larger countries point to the risk of a fall in February industrial production for the region as a whole. If so, it would further reinforce expectations that Q1 Eurozone GDP w ill decline. The German ZEW survey for April, which w ill be amongst the first economic indicators for this month may give a slightly more positive picture as it is expected to show a further improvement in both current conditions and expectations. Finally, a busy data calendar for China includes Q1 GDP and March updates for fixed investment, industrial production and retail sales.
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