Post date: 08/02/2021 14:07

As risk assets worldwide continue to print fresh records, led by US stocks, the pound has been the big winner so far in 2021. The rollout of the COVID vaccination programme has led to every other major country in the world, and the currency performance reflects high hopes the UK will emerge from the pandemic lockdowns and restrictions earlier than its peers. The euro continued to struggle on poor vaccination results while the US dollar put in another mixed week. This week is relatively light in data. We expect the focus to be on the US inflation numbers out Wednesday. We note that inflation numbers have surprised significantly to the upside lately in almost every G10 country. We expect this trend to continue as resilient demand runs into COVID-related supply bottlenecks.


The UK continues to outperform all other major countries in vaccinating its population, and has built a particularly large lead against European ones, having now administered one doses of either of the Pfizer of AstraZeneca jab to more than 12 million people. Sterling continues to remain the best performing currency in the G10 so far this year on the back of that gap. Sterling also received an assist from the Bank of England, which sounded more optimistic and made it clear that negative rates aren’t on the horizon. The main news this week will be GDP growth for the last quarter of 2020, which we expect to print just barely positive.


There were conflicting signals from the Eurozone economy. Fourth quarter GDP contracted modestly due to the renewed lockdowns in much of the continent, but January inflation came out considerably above expectations. Markets, however, ignored the inflation number and focused instead on the slow pace of vaccinations, which unless remedied will push the economic recovery into the future. Even the major nations on the bloc have so far only administered approximately 3-4 vaccine doses per 100 people, versus more than 10 in the US and 17 in the UK. We think that the euro may struggle to rally in the short-term, though we maintain our positive long-term view.


The US payrolls report was mixed. The US economy has added few jobs since October, according to the establishment survey. However, the household survey paints a better picture, as unemployment fell an unexpected 0.4%, of which no more than a quarter can be attributed to the fall in labour force participation rate. We expect a large stimulus package to make its way through the Senate. The combination of a strongly dovish Federal Reserve, massive bond issuance to finance deficits and prospects for a large stimulus package continues to hammer the Treasury markets. The 30-year yield there has risen 80 basis points since its lows of summer of 2020. The dollar has generally reacted to this sell-off in a negative way throughout this time. A massive auction of fresh Treasuries this week will provide a key focus for traders.