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Parky’s quick take: 12 February 2024

Neil Parker, FX Market Strategist, shares his views on currencies and FX markets for this week.

UK credit conditions still on a worsening trend, will the economy look better?

Are the signals from the UK economy getting worse? We’ll know more after the end of this week, with a plethora of data releases due. The Bloomberg financial conditions indicator released on Friday of last week showed a sharp rise in the index, albeit the jump in the reading still leaves it well below where it started the year. So while there are more signs of encouragement, the underlying credit situation does not appear to be materially supportive of a return to growth.

The UK’s economic performance in the second half of 2023 was disappointing, and could have been capped off by the UK plunging into a technical recession in Q4. Meanwhile there are increasing signs of consumers restricting spending on non-essentials, even while the savings ratio remains elevated, and in the face of weakness in hiring intentions and pay growth from employers, and weakness in investment spending.

So the medium-term prospects aren’t great, but in the very short-term is there a risk of some UK economic outperformance versus expectations? I think we could see that this week - which would reduce near-term speculation that the Bank of England will cut rates, and meanwhile the UK could look relatively healthy versus the Euroland, when its batch of survey/data releases are concluded. There are some risks of a renewed push higher in GBPEUR towards €1.1770/80, and GBPUSD might try once again to push up towards and through $1.27. I doubt this week will prompt any range breakouts, but the risks are skewed to the topside in GBP, in my opinion.

In terms of Euroland, the central bankers at the European Central Bank should be getting ever more concerned by the weakness of the German economy. Over the weekend, figures on German office rental prices recorded the largest drop since records began, and the poor performance of the German economy has prompted right wing party AfD’s rise to second in the polls. A problem that began in German industry has spread to the services sector, and it might require a lot of fiscal/monetary stimulus to fix, in my opinion. The EUR could be lagging other major currencies in terms of performance, as questions intensify about Germany’s ability to recover, and the risk it drags other economies down with it.

Finally, the US continues to perform solidly. Last week saw a stronger services ISM (Institute for Supply Management) reading for January, and a rebound in mortgage applications in the last week. The arguments for an early rate reduction from the Federal Reserve appear to have evaporated, and it looks as if Q2 is the earliest the Fed could consider its first interest rate cut, in my view. The markets may be looking in the wrong place for signs of trouble though. The idea that there will suddenly be a worsening in the US economic performance is misplaced, in my view.

The latest regional bank to fall foul of investor sentiment, NYCB (New York Community Bancorp), which bought parts of Signature Bank last year when it got into trouble, has seen its share price more than halve. Is this the beginning of another regional banking problem, or an isolated incident? The Fed will be watching on from the sidelines, but the cause of NYCB's problems was the all too familiar issue of real estate credit losses.

Czech central bank’s surprise 50 basis points cut comes as growth outlook materially worsens

Last week’s plethora of central bank decisions passed off broadly uneventfully with the exception of what happened in the Czech Republic. A cut of 25 basis points was expected, but it cut 50 basis points from the official rate, citing a worsening in the growth outlook as sufficient reason.

For many emerging market economies, weakness in the domestic outlook is becoming increasingly troubling. Why is that message yet to permeate major Western central banks? I think there is still too much focus on lagging indicators such as the labour markets, and too little recognition of the global weaknesses in demand. However, perhaps just like in 2021, when emerging central banks led the developed central banks in terms of rate hikes, we are seeing the same trend in reverse in terms of monetary loosening now. 

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