The U.S. dollar traded higher against most of the major currencies Tuesday despite weaker new home sales and cautious comments from Federal Reserve Chairman Jerome Powell. Along with his peers, Powell made it clear that he sees only a temporary rise in inflationary pressures. Treasury Secretary Janet Yellen avoided market-moving comments in her closely watched testimony as well. For the next 24 hours, the focus shifts to Europe, where PMI reports are scheduled for release.
This is a busy week for the British pound. Today’s labor market report will be followed by inflation and PMI numbers on Wednesday and retail sales on Friday. Despite fewer than expected job losses at the end of the year and a lower unemployment rate, GBP/USD sold off for the fourth day in a row. So far, the U.K. has vaccinated more than 50% of its adult population and, as a result of this aggressive effort, yesterday’s death rate was the lowest since September 2020. Its success will pay dividends quickly, but for now, investors are worried about vaccine supply from India slowing, tensions between the EU and U.K. on vaccine exports, the central bank’s dovishness and the prospect of a summer-long travel ban. On Thursday, The U.K. Parliament will vote on the country’s new “Roadmap Regulations” that will include a GBP5,000 penalty for vacations abroad.
Data was better, but still not great. For the first time since the pandemic, the U.K. unemployment rate declined, but with 147,000 job losses at the end of the year, joblessness is still near a five-year high. U.K. inflation and PMI numbers are due for release tomorrow. Faster consumer and producer price growth is expected as commodity prices increased sharply last month and the February PMIs showed rapid manufacturing and service sector price rises. Smooth vaccine rollout should also promote stronger manufacturing and service sector PMIs. All of this is positive for sterling, but will it be enough to renew the currency’s rise?
First off, if any of these reports surprise to the downside, we could see big losses in GBP because investors expect good numbers. Weaker service or manufacturing PMIs could take GBP/USD to 1.36 easily. If the data is in line or better, how sterling trades will be dependent on the market’s broader appetite for risk and U.S. dollars.
The risk of weaker Eurozone PMIs drove the euro lower against most of the major currencies. In our last note, we said now is not the time to buy euros. One of our main arguments is ongoing weakness in the Eurozone economy. Tomorrow’s PMI reports should show just that, and more troubles lie ahead. The German government just announced a strict five-day stay-at-home order for the Easter holiday as the region struggles under a third wave.
Meanwhile, the biggest movers were the commodity currencies. The New Zealand dollar lost more than 2% of its value after the New Zealand government took steps to rein in the housing market. From taxes on investors to restrictions on interest deduction and an increase in affordable housing, they are taking aggressive steps to drive prices lower. In just 12 months, house prices rose more than 23% as low interest rates encouraged investors to park their funds in real estate. It also doubled the bright line test, which requires investors to hold onto property for 10 years instead of five to avoid paying taxes. The Australian dollar followed NZD lower, but the Canadian dollar resisted losses thanks, in part, to the Bank of Canada’s decision to end market functioning programs introduced during the pandemic. With manufacturing activity slowing, New Zealand’s trade balance could disappoint, which would exacerbate the slide in NZD. Australian PMIs, on the other hand, may not be that weak.