Euro steady in spite of ECB noises
The ECB last week reacted in the usual belated fashion to the sharp rise of the Euro and its potential effects on Eurozone inflation and economic recovery.
Enrique Diaz-Alvarez, Chief Risk Officer.
For now, the impact on the currency was muted, but we expect to see many variations on the theme that the currency has risen too much, too fast in the coming weeks, which introduces short term downside risks for the euro. All G10 currencies lost ground against the dollar save Sterling, buoyed by the UK´s fast progress in vaccinating its population. Emerging market currencies were mixed, but overall they withstood fairly well the significant sell off in stocks and risk assets in general.
The short squeezes in some stocks like GameStop have provided plenty of entertainment and lush news coverage but we expect the impact on currency markets to be negligible, given the much larger volumes and limited retail investor access to these markets.
We expect markets will focus on economic data next week. The Eurozone calendar is busy, with fourth quarter GDP growth released on Tuesday and January inflation on Wednesday. The former is expected to be negative, while the latter should rebound on technical factors in Germany. Namely, the reversal of a temporary reduction on German VAT and higher energy taxes. In the UK, the January meeting of the Bank of England will be held on Thursday. Finally, the US January job market report out Friday will also be closely watched.
GBP
The UK is vaccinating people faster than any other major country, and we believe this has a lot to do with the relative performance of Sterling against the Euro in the last few weeks. Last week was no different, and Sterling rose against every other G10 currency. Thursday's meeting of the Bank of England should be a non-event, and the MPC will vote unanimously to stay on hold and keep its options open. We expect the Pound to continue to trade well as the prospect of an end to the lockdowns draws closer.
EUR
Eurozone central banks in the Netherlands and Finland expressed their discomfort with the speed and extent of the recent Euro rally last week. Expect to see more of this in coming weeks. Poor economic data this week should weigh on the common currency, as will continued subpar performance on the vaccination front. We expect to see a sharp one-off rise in Eurozone inflation this week, largely due to technical factors in Germany. Markets should pay more attention to first-quarter GDP growth. There is room for a downward surprise there and we may see euro weakness as a result.
USD
The recent negative correlation between dollar performance and risk assets weakened this week. While stocks worldwide tumbled, the US dollar failed to rally significantly against most other currencies. The key payrolls report for January comes out Friday. Markets are expecting an essentially flat report, both in terms of the unemployment rate and the number of jobs created or lost in January. The lack of historical precedent makes it harder than ever to make a prediction, but we are on the side of a positive number given the absence of generalized lockdowns in the US in January
Press Contacts:
Olivier Duquaine
