Weekly Market Update 04/05/21

The currency markets marked time for most of last week as they waited for the monthly meeting and press conference from the US Federal Reserve and the end of the month. The Federal Reserve signaled more of the same on policy, and sterling continued to trade sideways before month-end rebalancing pushed the pound lower, and it has opened at $1.3880 this morning. Sterling has been stuck in a very tight range of fewer than 50 pips for the last few trading sessions, which was its tightest range since 2014. So far, the pound has shrugged off the political issues in Westminster, concentrating instead on the good news on the dropping number of Covid infections and the successful gradual lifting of lockdown restrictions.

We expect an eventful week both in the UK and the US both in the political and financial worlds culminating in a super Thursday in the UK when local elections will vie with the Bank of England for attention. It also promises to be an exciting week in the US as the latest employment data sets are released on concurrent days until the key Non-Farm Payroll figure on Friday. Data is starting to reflect a stronger than expected recovery in the UK, with the much-heralded pent-up demand hitting the high street. The Bank of England is beginning to come under pressure to start tapering some of the aid that it has been giving to the economy, and we will be studying its quarterly Monetary Policy Review for hints to future policy.

UK

The monthly Bank of England meeting this Thursday will share centre stage with the UK's local elections. Of particular interest will be how the Scottish Nationalist Party fare in the Scottish Parliamentary Elections. If they manage to gain an outright majority or form a coalition with the pro-independence Green Party, the calls for a second independence referendum vote will mount, a strong performance by the SNP may unsettle sterling.

The Bank of England meeting is expected to upgrade their forecasts for the economy, including a larger rebound in the second quarter and a lower peak in unemployment than was previously forecast. There is little chance that their interest policy will change, but the speed at which they are buying assets could well be slowed, which would overshadow any political issues and boost the pound. Later this morning, the monthly Purchasing Managers Indexes (PMI) will be published by Markit.

Euro

Good news is starting to filter through into support for the euro as the vaccination programs are accelerating and lockdowns are being rolled back. The single currency is also benefitting from the likelihood that the EU recovery plan at last looks like it will be implemented sooner rather than later. Politically, however, both France and Germany face challenges that may curb enthusiasm for the euro, which has opened at €1.1529 against the pound. Last week's economic data was mixed, with inflation jumping to 1.6% while technically in a recession.

In the week ahead, we will be listening for how the European Central Bank is feeling ahead of its next meeting. Tomorrow on the data docket we have Markit's take on European Purchasing Managers Intentions and the Eurozone's Producer Price Index, and on Thursday, its Retail Sales for March are published.

US

After the lack of impact that last week's Federal Reserve meeting had, the week ahead promises to be a bit more exciting. With nearly 150 million Americans now have received their first dose of the vaccine and many in receipt of their stimulus cheques, the economy is starting to fly. Reports of solid debit and credit card transaction numbers infer that leisure and hospitality are booming. At last week's meeting, Jerome Powell again reiterated that the Federal Reserve had a steady as she goes policy over the economy. Still, with analysts forecasting up to one million new jobs having been created over the last month, pressure is likely to increase on the central bank to reign back its lending.

Yesterday saw the release of a disappointing ISM, dented by the semi-conductor shortage, and this afternoon we have the latest US Factory Orders to digest. This week, there are three sets of employment data, starting tomorrow with the monthly white-collar employment data from ADP. On Thursday, the weekly jobless numbers and on Friday, the Non-Farm Payroll jobs report is released. Wedged between the employment data Markit will release its Purchasing Managers Indexes.

Scandi

The Swedish krona started its trading week on Monday by weakening after the Swedbank PMI Manufacturing figures were released but recouped ground as the day came to an end. On Wednesday, the Industrial Orders figures for March are released, and we will also get the Household Consumption data whilst the most recent Budget Balance will be reported on Friday. The Norwegian krone ended the month of April on a high note breaking through the psychological 10 barrier against the euro. The oil price has recovered to pre-COVID-19 levels, which has supported the recent krone bull run together with continuous speculation that Norway will be the first G10 country whose Central Bank increases interest rates. The DNB PMI Manufacturing figures, which were released yesterday, were somewhat worse than expected.

The market will focus its attention on the coming Industrial Production figures out on Thursday and the Deposit Rate announcement by Norges Bank Governor Olsen, the market does not expect any change.