Monex: GBP rebounds thanks to UK partial 'reopening' today

Monex: GBP rebounds thanks to UK partial 'reopening' today

Currency
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This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe

GBP

Sterling is trading slightly higher against the dollar this morning while gains are larger against the euro. There is a buzz around the UK this morning and the positive sentiment is filtering into GBP as parts of the service sector reopen this morning.

After nearly 100 days, non-essential shops and services will re-open subject to capacity limitations, while the hospitality sector reopens to outdoor guests. The emphasis going forward will now be on how aggressive the consumption rebound in the UK is after households stockpiled liquid deposits over the past year. This is a highly contentious topic in the Bank of England with key policymakers sitting on either side of the debate.

Only time will tell how consumption recovers after the pandemic, but with the consumer now less constrained by government measures, timely data points will be key in determining how strong the rebound is. Although alternative data like the BoE CHAPS data will be noisy at first, an underlying trend is likely to appear and will determine how strong the initial rebound in UK assets is.

In Brexit, the UK and EU are making progress in talks on how to apply post-Brexit trade rules in Northern Ireland, which have in part caused the latest set of protests in Belfast. Today, the data calendar is empty for GBP with just BoE member Silvana Tenreyro speaking on economic shocks and trade at 14:00 BST.

 

EUR

The euro held up well against the US dollar last week and was among the better performers as hopes for a faster vaccine roll-out in Q2 prompted investors to give the euro the benefit of the doubt despite the backlog in vaccinations so far.

This week, the pair will be at the mercy of developments in US Treasury yields given today’s Treasury auction and tomorrow’s US CPI data releases. Over the weekend, ECB member Fabio Panetta commented on the eurozone growth prospects and stated the euro area will not return to its pre-crisis growth path unlike the US, and added that two years of economic expansion may have been permanently lost.

While this is dependent on how consumption patterns in the recovery phase will materialise and if there will be a large wealth and pent up demand effect, Panetta’s comments correctly point to the elevated upside risks to US inflation compared to eurozone inflation given the amp fiscal and monetary responses from the US while much of the roll-out of the EU recovery fund still is uncertain.

 

USD

The US dollar managed to resist further depreciation across the board this morning after the dollar index fell by 0.90% over the course of the last week. The dollar’s losses were capped as higher-than-expected producer prices on Friday increased inflation expectations ahead of Tuesday’s consumer price index figures, which stemmed the slide in Treasury yields.

Federal Reserve Chair Jerome Powell stated in an interview on Sunday that the US economy is at an inflection point with stronger growth and hiring ahead thanks to the rising vaccinations and powerful policy support, although the virus remains a threat.

For today, US Treasuries will be watched ahead of auctions in 3Y and 10Y notes later this afternoon while the economic data calendar is sparse for today. The bid-to-cover ratio will be an important factor as Treasury demand will help shape the outlook on US debt prior to the CPI release, which could show a substantial rise in inflation tomorrow due to base effects.

With the Federal Reserve warning against the temporary inflation overshoot that's about to become visible, how primary dealers position themselves ahead of the release will be telling for bond investors and markets generally. US yields still remain a dominant driver of FX price action and the broad US dollar and with little on the calendar in the G10 today, how the bond market performs will be of heightened importance.