Lagarde ECB Vaccine Blog

GBP – Vaccine rollout starts

Optimism that an end to the pandemic crisis is getting closer has given a boost to financial markets. The UK is out of national lockdown and is the first country to approve the Pfizer/BioNTech vaccine.   Other vaccines may be approved soon, though it will take some time for a significant proportion of the population to be vaccinated.  It is also unclear whether the disease can spread after immunisation and the length of protection. However, business surveys last week showed an improvement in confidence, with the November services PMI showing a significant improvement.

The pound appreciated for a fifth week in a row against the US dollar to close to 1.35.  It was mostly flat and fell back slightly against the euro. Manufacturing and services PMIs were revised higher to 55.6 and 47.6, respectively, highlighting the current two-speed economy.  Output in the manufacturing sector may have risen due to stockpiling as a result of Brexit uncertainty

The most significant data this week is October GDP. The composite PMI was above 50 for the month, though other data suggests GDP may have fallen. The markets expect a fall of 1.0% for the month, which would leave GDP 9% below February.  The services sector is likely to have felt the bulk of the impact due to social distancing restrictions. . A further fall in GDP in November is likely with the national lockdown.

GBPEUR – 1.1057

GBPUSD – 1.3412

EUR – EU Summit and ECB decision

A Brexit deal has yet to be agreed.  Negotiations remain, although sticking points remain. In any agreement is reached, EU leaders would then need to approve a deal at the European Council meeting from Thursday. Any agreement will reduce trade frictions compared with no deal.  There will in any case be greater trade frictions compared with the transition period.

The European Central Bank (ECB) is expected to announce additional policy stimulus on Thursday.  The additional Covid restrictions are weighing on economic activity.  Economic projections from the ECB are expected to show the Eurozone economy contracting in the current quarter.  Despite vaccine hopes, the forecasts may also show downward revisions to growth and inflation further out. Hence, a key message will be that ECB support for the economy will be maintained for a considerable period of time to come.

The ECB is likely to provide support via the PEPP (Pandemic Emergency Purchase Programme) and TLTRO (Targeted Longer-Term Refinancing Operations). The ECB is likely to increase the target for asset purchases by around €500bn and to extend the program until at least the end of June 2021. The ECB’s official deposit rate is -0.5% and is unlikely to change whilst banks can currently obtain loans via TLTRO3 at as low as -1%.  ECB President Lagarde may also comment on the euro’s recent appreciation towards $1.22.

EURUSD – 1.2129

EURGBP – 0.9044

USD – Recovery in doubt

US November payrolls were much worse than expected at 245,000, which is the smallest employment gain since May.  In November, nonfarm employment is still around 9.8m below the level in February.  The unemployment rate fell to 6.7% which was in line with forecasts.

The US calendar is quiet this week. There are no Fed speakers ahead of the next week’s FOMC policy decision. The most important data include CPI inflation and weekly jobless claims.  These will be closely watched to see if the jobs situation continues to deteriorate.  The University of Michigan consumer sentiment survey will also provide forward-looking data.  In the meantime, market focus will remain on whether a new fiscal stimulus package can be agreed.

GBPUSD – 1.3412

EURUSD – 1.2129

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*Interbank rates correct as at 7 am on the date of publishing.