Mixed-bag UK data and company news failed to derail the rally in the pound, while the FTSE only edged slightly lower as investors continue to concentrate on the ongoing reflation trade.
Reflation trade keeps pound underpinned
The pound has stormed back to life over the past couple of days, rising nearly 300 pips from Friday’s low to climb above the 1.40 handle again.
Expectations continue to grow that the pound and UK’s value stocks will benefit from a post-pandemic surge in growth and inflation. Investors have warned towards U.K. assets because of the nation’s decisive action on the Covid vaccinations programme and management of the infections with daily rates and deaths continuing to fall. The government’s vast fiscal spending programmes have also helped to offset the economic damage of the pandemic with many jobs saved due to the furlough scheme and other government measures.
All this means is that as lockdown measures are lifted slowly, pent up demand should help to fuel a strong economic recovery, with investors also no longer having to worry about the Brexit uncertainty which had weighed on sentiment over the past several years. These expectations are the reasons why investors continue to buy short term dips in both the pound and U.K. stock market.
GBP/USD tags 1.40 handle, but more gains likely
After finding strong support around the 2020 high of 1.3686, the cable broke out of its bull flag pattern to the upside on Friday, leading to a sharp continuation higher on Monday. Today it has reached the psychologically-important level of 1.40, meaning that a bit of profit-taking should be expected after the big two-day rally. However, the breakout means that the path of least resistance remains to the upside and after a short period of consolidation I am expecting the pound to continue higher. I think a retest of this year’s earlier high at 1.4243 is highly likely:
Key support now comes at 1.3920 and then 1.3844. The former was previously resistance while the latter marks the point of the origin of the recent breakout.
UK data recap:
The Average Earnings Index rose 4.5% in the three months to February compared to a year-ago period, down from 4.8% in January and below 4.7% expected.
But during the same period, UK’s unemployment rate unexpectedly fell to 4.9% from 5.0% previously despite most of the nation being under strict lockdown rules. The ONS said the domestic jobs market was “broadly stable” but “remains subdued”. Director of economic statistics at the ONS, Darren Morgan said: “The latest figures suggest that the jobs market has been broadly stable in recent months after the major shock of last spring. The number of people on payroll fell slightly in March after a few months of growth.
Jobless Claims beat expectations as only 10,100 applications for unemployment benefits were made in March compared to 24,500 expected and 86,600 in February.
More UK data coming up…
…but it remains to be seen whether the pound will respond.
Wednesday will see the release of UK CPI, which is expected to have doubled to 0.8% y/y in March from 0.8% in February. Bank of England Governor Andrew Bailey is also speaking on Wednesday and his commends on monetary policy will be scrutinised now that the U.K. is lifting Covid lockdowns and vaccinations continue at a very good pace.
Thursday will see the release of CBI industrial order expectations followed a day later by the publication of the March retail sales report and the latest PMI data. Retail sales expected to have risen 1.5% compared to the previous reading of 2.1%. The services sector PMI is seen improving to 58.6 from 56.3, while manufacturing PMI is expected to have edged higher to 59.0 from 58.9 previously.
UK company news
The FTSE was down about 0.2% at the time of writing Tuesday morning as gains for miners were offset by sharp falls in shares of British American Tobacco (BATS) and Imperial Brands (IMB) – they both fell by more than 5% on reports that US was considering nicotine cuts in cigarettes. Associated British Foods (ABF) meanwhile narrowed its losses to about 1.3% after sliding as much as 4% after Primark losses caused its profits to halve in the first half.
Coming up later today
The focus will turn to American company earnings with Netflix set to report its quarterly numbers after the closing bell tonight. Johnson & Johnson will publish its figures ahead of the opening bell.
Here’s what’s in store for the remainder of the week
Tuesday
- Earnings: Netflix, Johnson & Johnson and PG
Wednesday
- Data: CPI estimates from NZ, UK and Canada; Aussie retail sales and US crude oil inventories
- Bank of Canada policy decision and speech by BoE Governor Bailey
- Earnings: Verizon Communications and Carrefour
Thursday
- Data: US jobless claims
- European Central Bank meeting and press conference
- Earnings: Intel, AT&T, Snap, American Airlines, Renault and Taylor Wimpy
Friday
- Data: Flash manufacturing and services PMIs from Eurozone, UK and US; U.K. retail sales
- Earnings: Royal Caribbean Cruises, Honeywell International
