USD rebounds, GBP stronger with negative rates downplayed
With an ever-isolated President Trump being hounded out of office, Biden made his mark last night with a USD1.9 trillion relief package for the USA. Fed Chairman Powell committed to keeping interest rates low for the foreseeable future, and maintaining stimulus for the US economy. Economists are starting to discuss re-inflation and prospects of a global rebound – yields are beginning to rise, and the relative speed of national recovery will add to medium-term re-balancing in FX markets.
GBP: GBP has performed well for the past week, with a swift vaccination process and the Bank of England talking down prospects of negative rates. Governor Bailey suggested that negative ‘retail’ interest rates are untested and undesirable in the short-term, boosting GBP. The interest rate decision in February will be closely watched, with many economists expecting a 0.1% cut, taking rates to 0, rather than into negative territory.
UK GDP beat estimates this morning, coming in at -2.6% vs expectations of -2.7%, keeping GBP steady, with GBP/EUR at 1.1240 and GBP/USD at 1.3650.
Although better than expected, the numbers show a contracting economy, highlighted by the Chancellor: “Today’s GDP figures highlight the scale of the challenge we face,” the UK Finance Minister Rishi Sunak said after the release. Alongside this print, an Index of Services showed a large contraction in November, which takes into account the new lockdown measures and the extent of the virus surge in the UK.
USD: After a period of weakening, which has been sustained by Fed Chairman Powell reiterating that rates and the bond-buying program will remain accommodative, the safe-haven USD moved higher overnight – rebounding from 3 year lows.
After a 7% decline at the end of 2020, the USD has rebounded, alongside rising yields, as prospects of a strong US (and global) recovery filter through the market. EUR/USD trading 1.2150, under the crucial
President-elect Joe Biden presented a $1.9 trillion relief package as expected. The scope of the plan – the first of a two-pronged approach – was already priced in by markets. Moreover, he talked about people "paying their fair share" and investors are concerned about rate hikes. It is also unclear how much of the plan can be approved as Democrats have thin majorities in Congress.
CAD: In the previous 3months, USD/CAD has declined from 1.3300 to 1.2700 on the back of a weak USD and a strengthening CAD. Faith in the Canadian economy has remained resolute, and rebounding commodity prices have aided the currency, which is at levels not seen since 2018.
AUD / NZD: Both fell overnight after recent rallies, as risk sentiment turned back towards the USD.
China: Trading vs USD at 6.47, and looking ot gain ground after upbeat comments from the Central Bank, alongside decent industrial numbers recently – despite some parts of China back in confinement after 8 months without Covid cases. The People’s Bank of China’s (PBOC) Vice Governor said Friday, the central bank’s monetary policy in 2021 will provide the support necessary for the economic recovery – an explicit boost of confidence for the economy.
Quotes:
Prudent monetary policy in 2021 will be more flexible, targeted and appropriate.
Monetary policy in 2021 will provide necessary support for economic recovery.