Inflation Fears Continue Worrying Currencies
The market spent the last week trying to interpret the mixed signals coming from the US economy. The hotly anticipated Consumer Price Index came in higher than the market was expecting and reported an inflation figure above 4%. Predictably stock markets fell, treasury yields rose, and the dollar caught a bid. However, after closer inspection, the market decided that there were some anomalies in the data, and the dollar retreated. Markets are firmly stuck in a push me pull me mode where the gloomy unemployment numbers released in the US contradict rising inflation numbers. With the Federal Reserve having a dual mandate to achieve maximum employment and stable prices, it is unlikely that they will change their dovish stance until unemployment drops; however, the market will continue to be nervous of inflation taking hold and bouts of selling off bonds are inevitable. As would be expected, sterling was buffeted by the dollar’s gyrations at one point, trading up above $1.4150 before settling back to $1.4080, where it has opened this morning.
In the week ahead, the direction of sterling is most likely to be driven by data on both the economy and Covid. After the US spent last week digesting inflation and employment data, it is the UK’s turn with the Office of National Statistics (ONS) releasing a cornucopia of data midweek. Prior to this, England reopens indoor hospitality today as we take another step towards normality returning, and the economy receives another shot in the arm. Prime Minister Johnson did sound a word of caution early on Friday evening when he warned about the rise in the so-called Indian variant. Still, so far, it does appear that the mass vaccination programme will give the UK a good level of protection against this. Away from the UK, the financial world will keep an eye on the ongoing conflict between Israel and Hamas. If it looks like turning into a more widespread regional conflict, a rapid change in risk assessment would occur, causing a flight to safe-haven currencies such as the dollar and increasingly the Japanese yen.
UK
The pound gradually appreciated against the euro last week and has held onto its gains to open at €1.1615 this morning. For the time being, concerns over the implementation of the Brexit trade deal are being shrugged off as investors focus on the positive effects of the UK’s vaccination programme. One of the positives is that indoor hospitality reopens today, which will probably mean a quiet lunch session as City traders visit their favourite hostelries for the first time this year. However, as lockdown restrictions are further lifted, the market will be watching nervously for signs that the Indian variant is spreading, which Boris Johnson cautioned about last Friday evening. We have a full to bursting data docket in the UK this week starting tomorrow when we will be watching the April unemployment rate, which is expected to show a slight decline. On Wednesday, we will see if inflation is indeed taking off in the UK when the ONS will release April’s CPI, which will probably report an annual rate of 1.5%. Also due for release are the Consumer Price and Retail Price Indexes. On Friday, the Retail Sales figures for April will be reported, and these should show a healthy rise reflecting the gradual reopening of shops. Also released on Friday are the May Purchasing Manager’s Indexes (PMI). There is a complete set of speakers from the Bank of England starting this afternoon when Andy Haldane, Dr Vlieghe and Silvana Tenreyro speak. Tomorrow Andrew Bailey, Ben Broadbent and Dave Ramsden will give evidence to a House of Lords committee investigating the Bank’s Quantitative Easing policy.
Euro
Europe and the euro were side-lined for much of last week as the US took centre stage, and with a quiet data calendar ahead on the continent, this could well be the case again. As often happens in calm markets, politics may rise to the top of trader’s agendas. We will be studying the debate between Angela Merkel’s potential replacements on Thursday. There will also be various speeches from ECB luminaries in the week ahead, including Christine Lagarde tomorrow and Thursday and Phillip Lane on Wednesday. There is not much data to interest the market apart from the first revision to 1Q Eurozone GDP and a look at May’s flash PMIs across the continent on Friday, which are expected to stay strong as economies start to reopen after the recent lockdowns.
US
After last week’s roller coaster of a market for the dollar and equity indexes, we potentially have a quieter week ahead with a pretty light data docket. With the dollar a little more settled this morning and seemingly still ignoring the rising bloodshed in Israel, traders are likely to bide their time until Wednesday’s release of April’s FOMC minutes. Jerome Powell stuck to the script of not even contemplating a tapering of asset purchase at his press conference after that meeting. Whether he is alone in that view will be revealed in the minutes where at least a couple of the participants are not expected to be relatively so dovish. There are also several speakers from the Fed slated to speak, including Richard Clarida this afternoon. The US data docket is pretty sparse this week, with just weekly employment on Thursday followed by April Housing Starts, New Home Sales and May Markit Flash PMIs on Friday.
Scandi
The Swedish krona had a very volatile week, initially losing ground unprecedently but later recouping all its losses as Friday’s trading day came to a close. This despite Wednesday being a half-day and Thursday having been shut for the Ascension Day holiday. This week sees no major data releases, potentially leading up to further gains for the krona as technical traders will most likely be more active than day traders. We will therefore monitor support and resistance levels closely and the overall risk appetite of the market.
EURNOK is once again trading around the psychologically important 10.0000 mark, and the Norwegian krone strengthened against most other currencies towards the end of the week. Today Norwegians are celebrating the 17th of May, Syttonde Maj (Constitution Day), a major Public Holiday filled with parades and appearances by the Royal Family. This week sees no major data releases.
- Support and Resistance
GBP/USD
Support 1.3977 Resistance 1.4202
EUR/USD
Support 1.2018 Resistance 1.2256
GBP/EUR
Support 1.1550 Resistance 1.1678
Email: richard.matthews@gcpartners.co
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