Eastern European currencies rise as central banks turn hawkish there – Ebury UK
In a week with few notable moves among major currencies, a hawkish turn by central banks in Eastern Europe stole the show and propelled the Polish zloty and Hungarian forint to the top of the emerging currency performance rankings.
Commodity prices retreated, which had a predictable effect on oil-dependent currencies, and the Chilean peso and Norwegian krone were the week’s notable losers. The former was driven both by falling copper prices and the uncertain outcome of the Constitutional Assembly elections. Data flows around the world have become a bit more mixed, with some signs of weakness in the United States. However, trade activity PMIs, in our view the best leading indicators of economic activity, have seen strong rebounds and outperformed expectations in the Eurozone, the United States and the United Kingdom, which is bodes well for our optimistic view of the global economy this year.
We believe that inflation data releases have now become the primary focus of the markets, and forex is no exception. The personal consumption deflator, the Fed’s preferred measure of inflation in the United States, was released on Friday. Another upside surprise could rock bond markets around the world.
The British pound was among the best performing G10 currencies last week, helped by strong national data and optimism about the UK economic outlook. Unemployment fell in April, retail sales rose 9%, more than double expectations, but more importantly, the Composite PMI hit an all-time high of 62.0, indicating very strong expansion in all sectors.
Inflation has also more than doubled last month in year-over-year terms, but so far the development has been relatively modest and well in line with expectations. This is a generally positive backdrop and we remain bullish on the pound, but we would take a close look at news regarding the spread of the Indian variant of COVID as the main risk to our outlook for the UK.
The growth news for the first quarter was weak as expected, but markets looked past this lagging data and were comforted by the unexpected sharp rise in the services PMI index, which put the composite data at 56.9. This is the highest impression of the measure to date during the pandemic period and a harbinger of good things to come, especially now that the restrictions are further lifted.
Preliminary inflation data for May will not be available until next week. We expect the euro to slowly drift higher as markets digest the reality of converging vaccination rates and the economic rebound between the US and the Eurozone.
As U.S. rates continue to trade within tight ranges, the minutes of the Federal Reserve’s April meeting, released last week, showed that a minority of members are at least somewhat uneasy. comfortable with the radical change in the institution towards tolerance to inflation. For now, the market does not expect a decrease in the Fed’s purchases of treasury bills until 2022.
We believe inflation will tend to surprise upward over the next few months, but agree that the political threshold for the Fed to leave 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 months to come, in our view.
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