Forex Major Currencies Outlook (May 17 – May 21)

USD 

Inflation data in March posted some concerning numbers. Headline reading printed 4.2% y/y vs 3.6% y/y as expected with core reading rising 3% y/y vs 2.3% y/y as expected. Prices of used cars were the biggest contributor to the rising inflation jumping 10% m/m. Rising commodity prices in combination with supply chain disruptions and base effects all led to the rise in prices. Additionally, the shortage of labour caused by need for parents to stay at home due to the home schooling of children coupled with generous unemployment benefits led to companies needing to offer higher wages in order to attract workers. Inflation should continue to run hot until we enter Q3. It will be interesting to see how Fed members will react to the data and if they will still continue to characterize inflation as “transitory”. Higher than expected inflation caused investors to give higher probability to QE tapering. Wages declined by -3.7% for hourly earnings and -1.4% for weekly earnings. This drop can be attributed to reopening and rehiring among low income jobs. Retail sales in April came in unchanged from March, however previous month’s reading was revised higher to 10.7% m/m, thus making this another decent report. Retail sales rose 51.4% y/y showing the adverse impact on the economy that first lockdown had. 

EUR 

ECB member Martin Kazaks stated last week that ECB may consider slowing down the pace of PEPP purchases at their June meeting. ECB chief economist Philip Lane stated that they will assess PEPP program in June and it can lead to either raising purchases or cutting purchases. ZEW survey for May showed current situation measure of German economy improving to -40.1 from -48.8 in April. Expectations category had more impressive jumps with German expectations coming in at 84.4 vs 70.7 in April and EU expectations at 84 vs 66.3 the previous month. Expectations reading indicate an overwhelming optimism regarding reopening and mass vaccination among investors. European Commission has raised GDP forecasts for 2021 and 2022. GDP in 2021 is now seen at 4.3% vs 3.8% previously while GDP in 2022 is expected to be at 4.4% vs 3.8% as previously stated. Inflation still poses a big problem and is seen at 1.7% in 2021 and then dropping to 1.3% in 2022. 

This week we will have a second estimate of Q1 GDP as well as preliminary May PMI readings. 

Important news for EUR: 

Tuesday:

• GDP

Friday:

• Markit Manufacturing PMI (EU, Germany, France)
• Markit Services PMI (EU, Germany, France)
• Markit Composite PMI (EU, Germany, France) 

GBP 

SNP, Scottish National Party, pro-independent party, failed to secure majority at the last week’s election. They will form a majority government with Greens, also a pro-independent party, however markets are not seeing independence referendum being held in the near future. Additionally, Conservative party managed to win in Hartlepool, a Labour constituency since its creation in 1974, thus making the victory in by-election even more impressive. Markets have reacted to both events by boosting the GBP and sending GBPUSD pair almost 160 pips up at the start of the week. Prime Minister Johnson stated that England will move to Step 3 of lockdown easing on May 17. This includes reopening of indoor hospitalities while cinemas, pubs, restaurants and hotels will reopen with some capacity limits. 

First estimate of Q1 GDP showed the economy contracting by -1.5% q/q vs -1.6% q/q as expected and -6.1% y/y vs -7.3% y/y as expected. Real GDP Q1 2021 was 8.7% lower than where it was at the end of 2019, before pandemic caused disruptions. Household consumption declined by -3.9% q/q vs -1.7% q/q the previous quarter. The drop was led by spending in restaurants and hotels, which fell by -26.4% due to the covid related restrictions. Business investment plunged -11.9%, government spending rose 2.6% and net exports were positive contributor since imports fell by more than exports (-15.6% vs -11.6%). We are already mid-May, mid-Q2, so the Q1 GDP data will not have impact on the pound. One very encouraging data for Q2 GDP was March GDP data. It showed an increase of 2.1% m/m and with reopening combined with mass vaccination it will lead to strong April as well Q2 reading. 

This week we will have employment, inflation and consumption data as well as preliminary May PMI readings. 

Important news for GBP: 

Tuesday:

• Claimant Count Change
• Unemployment Rate

Wednesday:

• CPI

Friday:

• Retail Sales
• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI 

AUD 

Business confidence in April boomed. It came in at 26 vs 17 in March while business conditions came in at 32 vs 24 the previous month. They are both record highs and indicate great optimism about the economy moving further and getting out of the lockdown. All sectors are well into positive territory with services and mining leading the way of gains. High capacity utilisation indicates expansion in business investment and hiring. Final retail sales for March came in at 1.3% m/m vs 1.4% m/m as preliminary reported. For Q1 the reading came in at -0.5% q/q vs -0.4% q/q as expected. 

Inflation report for April from China showed CPI rising to 0.9% y/y from 0.4% y/y in March, but the real inflation jump can be seen in the PPI number. It jumped to 6.8% y/y from 4.4% y/y the previous month. The rise in iron ore prices as well as in non-ferrous metal (aluminium, copper, lead, nickel, etc.) prices contributed most to the rise in producer price index. ING analysts note that “semiconductor chip shortage is going to bring us chip inflation”. Expectations are for producers to pass on the burden of rising input costs to consumers, thus increasing inflation (CPI). 

This week we will have employment data from Australia as well as production and consumption data from China. 

Important news for AUD: 

Monday:

• Retail Sales (China)
• Industrial Production (China)

Thursday:

• Employment Change
• Unemployment Rate 

NZD 

Finance minister Robertson stated that economic recovery was better than expected. There is a scope to lower debt levels after the recovery is secure. At the moment, monetary and fiscal policies will remain accomodative. Card spending in April rose 4% m/m with astonishing rise of 108.7% y/y showing just how devastating the first lockdown was. 

CAD 

USDCAD dipped below the 1.21 level at the start of the week and stayed below it for the first part of the week. Combination of weaker USD caused by disappointing NFP report and rising oil prices due to the Colonial Pipeline disruption led to drop. The pair has dropped below levels seen in September of 2017 and it was at the lowest levels since May of 2015. Once Colonial Pipeline restarted mid-week, oil prices tumbled, the pair reversed and breached the 1.22 level before dropping back again at the 1.21 level where it finished the week. 

This week we will have inflation and consumption data. 

Important news for CAD: 

Wednesday:

• CPI

Friday:

• Retail Sales

JPY

BOJ summary of opinions from April policy meeting stated economy is likely to recover, mainly on external demand, but the outlook remains highly uncertain with risks skewed to the downside due to uncertainties caused by the pandemic. Household spending for March rebounded to 6.2% m/m from -6.6% m/m in February. This is the first positive reading in 3 months and although it is very welcoming it may be considered an anomaly. With reimposed state of emergency and falling income we cannot see consumption continuing to rise in the coming months.

This week we will have preliminary of Q1 GDP and May PMI readings.

Important news for JPY:

Tuesday:

• GDP

Friday:

• Markit Manufacturing PMI
• Markit Services PMI
• Markit Composite PMI

CHF

SNB total sight deposits for the week ending May 7 came in at CHF705bn vs CHF701.4bn the previous week. This is a significant jump in sight deposits considering the trend from the past month and may indicate that SNB wishes to push EURCHF closer to the 1.10 level.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}