Post date: 24/05/2021 11:04

In a week with few moves of note among major currencies, a hawkish turn by the central banks in Eastern Europe stole the spotlight and propelled the Polish zloty and Hungarian forint to the top of the EM currency performance rankings. Commodity prices pulled back, which had the predictable effect on oil-dependent currencies, and the Chilean peso and the Norwegian krone were the week’s notable losers. The former was dragged down by both the drop in copper prices and the uncertain outcome of the constitutional assembly elections. Data flow worldwide turned somewhat more mixed, with some hints of weakness in the US. However, the PMIs of business activity, in our view the best leading indicators of economic activity, posted strong rebounds and outperformed expectations in the Eurozone, the US and the UK, which bodes well for our optimistic view of the world economy this year. We think that inflation data releases have now become the main focus for markets, and FX is no exception. The personal consumption deflator, the Fed’s preferred inflation measure in the US, is out on Friday. Another upward surprise could rock bond markets worldwide.


Sterling was among the better performing G10 currencies last week, helped by strong domestic data and optimism surrounding the UK economic outlook. Unemployment fell in April, retail sales rose by a huge 9%, more than double expectations, but even more importantly the composite PMI surged to an all-time high of 62.0, indicating very strong expansion across all sectors. Inflation also more than doubled last month in year-on-year terms, but so far the move has been relatively modest and well within expectations. This is a generally positive backdrop and we remain bullish on the pound, but would look closely at the news around the spread of the Indian variant of COVID as the main risk to our outlook for the UK.


First-quarter growth news was weak as expected, but markets looked past that lagging data and were comforted by the sharp and unexpected rise in the PMI services index, which put the composite data at 56.9. This is the highest print in the measure so far during the pandemic period and a harbinger of good things to come, particularly now that restrictions are being unwound to a greater extent. Preliminary inflation data for May will not be available until next week. We expect the euro to drift slowly higher as markets digest the reality of a convergence in vaccination rates and the economic rebound between the US and the Eurozone.


While US rates continue to trade in tight ranges, the minutes from the Federal Reserve’s April meeting, released last week, showed that a minority of members are at least somewhat uncomfortable with the institution’s dramatic shift towards inflation tolerance. For now, the market does not expect any tapering of Fed purchases of Treasury bonds until 2022. We think inflation will tend to surprise to the upside over the next few months, but agree that the political threshold for the Fed to shift out of its extremely accommodative stance is now very high. The combination of inflationary pressures and the Fed’s reluctance to withdraw stimulus will continue to weigh on the dollar in the coming months, in our view.