Whats ahead? GBP rallies, yield rises of concern
A number of themes are dominating FX markets, laid out below and concisely put by Altana Wealth which I refer to here.
GBP: I turn to Altana Wealth for a great summary of GBP:
“GBP positives outweigh the Brexit negatives.
Disruption from EU departure will remain, but faster economic re-opening and re-engagement of foreign investor interest in UK assets plus strong Hong Kong migration flows should see GBP outperform”
GBP/EUR continues to push higher, stable above 1.1575 for more than a week. As the service sector re-opens, Altana expect a significant boost to the UK economy .. 7% - 8% GDP growth anticipated between Jan and May21. If this comes to fruition, other economies will have their work cut out to recover at the same pace, despite Brexit disruption in the UK.
EUR: Tuesday’s GDP figures will show the final GDP reading for 2020. Despite the disparate economies and reactions to Covid19 through 2020, this GDP reading will be closely watched.
Thursday’s ECB meeting is not expected to ring any surprises regarding interest rates, but the Press Conference might reveal (1) total commitment to supporting the Eurozone economies (2) guidance regarding a future ‘lessening’ of support measures. Striking the balance between the 2 will be key, if not this month, then through 2021 – making these Press Conferences very important.
China: Despite having reduced target growth for the next year, China’s economy remains resilient – Wednesday sees inflation data being released. As US y10yr yields rise, and hit the headlines, many economists will be looking at these numbers, especially if they add speculation to the global ‘re-flation’ story which is hitting the headlines.
USD: After last weeks better than expected jobs data, amid rising 10yr yields, this Wednesday’s (CPI) Inflation figures are expected to read 1.4%. If the print is higher than this, it suggests that REAL inflation is on the way, and the bond market was ahead of the game once again.
EUR/USD suffered after the strong data, falling under 1.1900 as the USD strengthened. However, many economists see the weakening trend continuing (EUR/USD was under 1.1000 in May2020, so a broad weaker USD trend is in place).
To summarise the inflation story that is hitting mainstream headlines, I turn to Altana Wealth’s summary:
“Stronger US/global growth = higher 10y yields, but as long as risk sentiment (S&P 500) remains supported, risk-on USD outflows should dominate (USD weakening)….
The other side of the story: Uncertainty about QE tapering, inflation (real yields) and Fed’s ability to control short-end (2-yr yields) – are potential sources of periodic USD strength”
AUD, CAD & NZD and south-east Asian currencies are all benefitting from a ‘risk-on’ sentiment due to improvements in global growth. Although most economists expect short-term volatility, there seems to be consensus around this trend continuing.