The pound (GBP) is ending the week higher against a basket of major currencies, despite arriving at Monday’s open on the back foot, yet again weakened by Brexit and pandemic-related woes. The week’s news raised fears around the UK jobs market as the furlough scheme nears its end, as well as worker shortages in key industries, bottlenecks in global shipping and a subsequent supply chain crisis paralysing British businesses. The building industry reported lingering construction delays amid soaring supply costs, and UK new car sales fell by a huge 22%, cementing concerns that the government’s ‘Build Back Better’ ambitions are under threat. The Confederation of British Industry director general Tony Danker called on the UK government to take drastic action, to “deploy temporary and targeted interventions” such as fast tracked foreign visas to fill skills shortages, as failing to do so would be “self-defeating”.
However, the pound’s greatest losses came after PM Boris Johnson’s tax hike announcement. The decision to increase National Insurance by 1.25%, which breaches Johnson’s election promise and has sparked backlash as analysts deem the hike significant enough to regress UK economic recovery by adding to job loss and causing household spending to retreat. Sterling (GBP) dropped 0.5% against the USD and 0.2% against the EUR, though on Thursday, experienced a short-lived rally following Bank of England Governor Andrew Bailey’s revelation that an interest rate hike could be coming in the first half of 2022. The Monetary Policy Committee will likely want to see an end to quantitative easing in December before raising rates, but four of eight members now believe that minimum conditions for a rate rise have been met. Disappointing UK GDP came yesterday as economic growth slowed to just 0.1% in July, leaving the UK still 2.1% below its pre-coronavirus pandemic level of February 2020.
The Eurozone enjoyed some positive data this week. European shares (EUR) climbed to near record highs, spurred by technology stocks which surged to their highest levels this year thanks to the rise in German factory orders. Fears surrounding its ability to fulfil the orders were also eased with the news that German factory output bounced back in July with a 1% rise after three consecutive monthly drops. The Organization for Economic Cooperation and Development (OECD) released an optimistic Economic Survey of Italy (EUR). Here it predicts the Italian economy will grow by 5.9% in 2021, and return to its pre-Covid levels by the first half of 2022.
Wednesday’s GDP data release showed Eurozone GDP up 2.2% on the quarter and 14.3% year-on-year – both up on predictions. GDP levels still have some catching up to do on pre-pandemic levels, however, as they currently sit 2.5% below their pre-Covid highs. Employment in the bloc also rose 0.7% quarter-on-quarter and 1.8% year-on-year.
The main event of the week, however, was yesterday’s ECB monetary policy meeting. As expected, the ECB kept interest rates unchanged and decided to begin reducing their Pandemic Emergency Purchase Program (PEPP). ECB president Christine Lagarde emphasised that the decision to slow the pace of bond-buying was not ‘tapering’, and that while a Eurozone economic rebound could be achieved with less monetary help, they are not out of the woods just yet. The euro (EUR) dropped to a three-week low in response.
Benchmark US Treasury yields came in at a two-month high early this week, rising 1.27% to 1.33% and underpinning demand for the US dollar (USD). Despite this, the greenback (USD) remained on the weaker side across the board, and on Wednesday, the US Federal Reserve reported in their ‘Beige Book’ that the US economy “downshifted slightly” in August amid renewed Covid-19 concerns. The surge in Delta-variant cases reportedly hit the already struggling US labour market, as job openings hit a record high due to worker shortage. Non-farm payrolls data from last month, which saw only 235,000 jobs added in August versus expectations of 720,000, and a decline in the unemployment rate to 5.2%, suggests that the US economy isn’t making substantial progress within the labour market.
As a response, in part, to the labour market issues, President Biden last night announced new vaccine mandates requiring the vaccination of all government employees, health care workers at facilities receiving funds from Medicare and Medicaid, employees of contractors who do business with the federal government and those employed within a business of 100+ staff. The new requirements are estimated to apply to as many as 100 million people in the US and are expected to be implemented within weeks.
A week that started with the resignation of Japanese Prime Minister Yoshihide Suga doesn’t appear to have made a radical difference to the yen (JPY). Despite some relatively significant fluctuation, the currency now sits at 109.969, almost exactly where it started the week.
Suga’s abrupt resignation did, however, seem to have been a boost for the equity benchmark, which rose to a 31-year high following seven consecutive days of gains before retreating. Hope of additional stimulus as well as strong trade data out of China had also enhanced Asia shares.
Elsewhere, some much needed positive news came in the form of GDP data showing better than expected growth in April-June. The 1.9% growth exceeded expectations, but the yen will still have some catching up to do on the near-4% GDP shortfall in January-March. Yesterday, the decision was made to extend emergency Covid restrictions until the end of September, as the country struggles with its fifth wave of the virus.
In Australia, the Royal Bank of Australia’s decision to keep the official cash rate (OCR) steady at 0.10% - a record low - provided some relief. The RBA’s plans to begin cautiously winding back its bond-buying program remain in place –indicating a level of confidence that the Australian economy (AUD) will bounce back.
It had been expected that the Covid outbreaks in Melbourne and Sydney and the subsequent lockdowns within the two main cities would delay any decision to begin tapering. But, RBA Governor Philip Lowe and his board decided to proceed with the taper nonetheless, reducing the amount of government asset purchasing, down from $5 billion a week to $4 billion a week until at least February 2022, an extension from the original November 2021 deadline. This commitment shows an acknowledgment from the Central Bank that Australia’s Covid bounce back may be more challenging than expected, but recovery is achievable.
Despite Australia seeing record Covid cases fuelled by the Delta variant, the Australian government yesterday announced plans to ease Sydney’s lockdown from next month, provided a 70% vaccination threshold is reached. This signals an abandonment of the government’s initial zero-Covid policy, and a move towards a virus suppression strategy.