Good Morning, Sterling fights on
Sterling continued to rally last week and now stands some 5.5% higher against the dollar than it did in mid-December and 6.55% higher against the euro. Several factors are driving the currency, most notably the continued expansion of the vaccination programme, which now sees over one-third of the population inoculated. The economy is now on the verge of a staggering reopening, and we all wait for the announcement from Boris Johnson of the government’s plans this evening with a mixture of trepidation and excitement. Also helping sterling is the, so far, smooth transition from the European Union. This is not to say that there are no problems by any chalk as the appointment of ex-chief Brexit Negotiator Lord David Frost to the cabinet this week infers.
The markets are increasingly trying to judge the strength and timing of the economic recovery. This was not helped by the mixed messages from the economic data released last week. The difficulty that investors face is neatly summed up by comparing US Retail Sales figures’ strength with the weekly employment data’s weakness. The market expects the Biden $1.9tln relief package to pass and help kick start a strong bounce back to resolve the unemployment levels. In anticipation, yields on Government securities are rising and touching the highest levels for a year. The most important events we will be watching in the week ahead are Federal Reserve Chairman Jerome Powell’s testimonies and how he views the economy. Over the last year, the Federal Reserve, in common with the other central banks of the world, have pumped unprecedented liquidity in the world’s financial system, and they all now face the problem of when and how best to turn the money taps off without causing panic in the markets.
Sterling had a strong close on Friday and has opened above the psychologically important level of $1.4000. The danger is that the currency overshoots in anticipation of a rapid reopening and the much talked about pent up demand being unleashed. This evening the UK’s population and the markets will be listening to the Prime Minister to see how quickly a semblance of normality can return. The pound will remain sensitive to the easing roadmap’s nuances that the government has promised to unveil today. Hopefully, with vaccinations becoming increasingly widespread, a large proportion of the population will have had their first dose by Easter. Still, with second doses not for a further three months, the government will likely err on the side of caution when it comes to ending lockdown. On the data front, the prominent figure this week is the monthly unemployment data out tomorrow, which hopefully will show a stabilisation, but it remains distorted by the ongoing furlough scheme. Also, of interest will be the Governor of the Bank of England in front of a Treasury select committee on Wednesday.
The euro ended the week against the dollar pretty much where it started and is trading this morning at $1.2110. The political risk has subsided slightly with Mario Draghi confirmed as Prime Minister in Italy. The issues over vaccine delivery are also calming down; however, the number of doses delivered is still low compared to the UK, which has encouraged sterling buyers again this morning, and it has opened at €1.1550. The economic data that was released last week was mixed. However, if a healthy number from the German IFO is released this morning, the euro may find some fresh buyers. Christine Lagarde is scheduled to speak this afternoon, but recently the ECB has seemingly been more relaxed about the euro’s level, so no market-moving comments are expected.
The US bond markets have been the focus of the financial markets’ attention for most of the year so far and will remain so this week. The yield on the bellwether 10-year Treasury bond has touched new highs at 1.34% as investors anticipate a recovery leading to higher inflation. The difficulty that central banks face is not to spook the bond markets by being overly optimistic of the economy, which would infer that the period of easy money was ending. If this were to happen, risk sentiment would sour rapidly, and a stock market rout could follow. So, no pressure on Fed Chairman Jerome Powell when he gives his semi-annual monetary policy testimony on Tuesday. There is quite a busy week on the data docket, including Consumer Confidence tomorrow, the 2nd estimate of Q4 GDP on Thursday and as normal the weekly unemployment data. On Friday, Personal Income and Consumption data are released, which will be watched for inflationary signs.
Despite Riksbank Council Member Skingsley saying that negative interest rates are very much being considered and should not be ruled out, the krona finished last week higher against the EUR. It is now heading for a positive ending to February, which has not happened for the past five years. The krona is the darling of most currency analysts and may in other words end what usually is a krona negative month on a positive note. And as such enter, what usually is a positive period on an extremely strong foot. It is, however, worth pointing out that it is losing ground against the pound, a fellow Beta currency. This week the GDP figure is released on Friday together with the latest Retail Sales, the Trade Balance and Producer Price Index. Expectations are very low meaning there is room for further positive surprises.
The Norwegian krone lost some ground early in the week but then became range-bound for the remainder of the week against most G10 currencies. The lockdown in the capital Oslo has now been lifted, and new COVID-19 cases seem to be under control. This week the unemployment rate is released on Friday and is expected to remain unchanged at 4.4%.
Have a great day!