Post date: 20/07/2020 11:47

Last week had little in the way of new critical information on either the world economy, fiscal or monetary policy, or pandemic data. It is perhaps significant that the euro rallied in this environment, as it may indicate that the path of least resistance for the common currency is up. Not even the lack of a final agreement on the structure and conditions of the EU recovery fund in the Eurozone was enough to dent the common currency, which opened in Asia on Monday morning still trading near the highest levels since 2018. Trading this week should be driven by a combination of politics, pandemic information and economic news. The expected announcement of a new fiscal stimulus package from the US Federal government and the fallout from the EU meeting will focus market attention, in addition to the evolution of contagion and death numbers in the US. The week ends with the release of the key PMIs of business activity in the Eurozone for July, where we continue to expect positive surprises.


Sterling was the worst performer out of all the G10 currencies last week, as Gilt yields continue to evaporate on weaker than expected economic news and no signs of progress are seen in the Brexit negotiations. The weak GDP data released last week is from May and therefore not terribly meaningful. This week, the flash PMI indices of business activity for July should provide a much more timely indication of the strength of the rebound from the April troughs. Retail sales data for June, also out on Friday, should also give us a much better indication as to how well the economy is rebounding now that lockdown measures are being unwound. We expect the PMIs at least to surprise to the upside, and are starting to think that the recent pound sell-off has gone too far.


The ECB July meeting last week proved a non-event, as we and most of the market had been expecting. The central bank considers (reasonably) that the massive programmes put in place in previous months are enough for now, and can afford to take a wait-and-see attitude. Focus shifts to the political front. EU leaders were unable to strike an agreement over the proposed 750 billion euro stimulus package at the weekend, with talks set to continue today. We still expect agreement to be reached here, if not today, at a second meeting not long into the future. The PMIs for July should continue to surprise to the upside, particularly since there has been so far no reinstatement of lockdown measures on a large scale, unlike in the US. These numbers should be enough to keep the common currency well supported, in our view.


There is no let up in the surge of new COVID cases in the US. However, this bad news is tempered by the lack (so far) of a similar increase in the number of deaths, and by the fact that the US is conducting more tests per capita than any other major country. So far, the impact of the COVID news has been offset by optimism over the prospects for a vaccine and economic data, including last week’s US retail sales figures that showed another healthy month-on-month expansion in June. The end of the $600 a week additional unemployment benefits in July now looms, and the pressure on Congress and Trump to put out a fourth fiscal stimulus package is increasing. We expect to see an agreement this week, and markets will be looking very closely at its size. A disappointment here would spell trouble for risk assets worldwide, though the dollar reaction would be hard to predict.