GBP, AUD End Week Near 3-Year Highs

There were some big moves in currencies on Friday, which was no surprise given the busy economic calendar. GBP/USD rose above 1.40 for the first time since April 2018, while AUD/USD and NZD/USD climbed to their strongest level since March 2018. Investors looked past softer economic reports in favor of stronger releases. The U.S. dollar sold off across the board as stocks rebounded from yesterday’s decline. Existing home sales and PMIs were stronger.

Despite surging virus cases and widespread restrictions in the U.S. and Europe, manufacturing activity continues to chug along. The hope is that this will continue as more people are vaccinated and restrictions are eased. Next week, Federal Reserve Chairman Jay Powell will delivery his semi-annual testimony on the economy and monetary policy. He’s made it clear that no rate hikes are on the horizon and it is too soon to consider tapering asset purchases. At the same time, he’s optimistic about the recovery, and expects stronger growth in the second half of the year. The combination of a positive outlook and policy accommodation is good for stocks, high-beta currencies and bad for the U.S. dollar. This week’s moves could be a reflection of investors positioning for the Fed’s optimism.

Sterling was not the day’s strongest performer (that title goes to the Australian and New Zealand dollars) but the move above 1.40 is significant. Retail sales were terrible. Consumer spending dropped 8.2% in the month of January, three times more than expected. However, sterling bulls were unfazed by this release, choosing instead to focus on stronger PMIs. Manufacturing and service sector activity improved in February, which drove the composite rate up to 49.8 from 41.2. This is significantly stronger than the 42.2 forecast. The PMIs are more forward-looking than retail sales, but consumer spending needs to recover to keep pace with manufacturing activity otherwise manufacturing will have to slow.

The return of Chinese investors drove the Australian and New Zealand dollars to fresh multi-year highs. Both currencies rose more than 1% against the greenback intraday and the breakout after a period of consolidation in AUD/USD and NZD/USD could lead to further gains in the coming week. Australian and New Zealand data was actually disappointing, with very little producer price growth in New Zealand in the fourth quarter. In Australia, manufacturing activity slowed, while retail sales growth missed expectations. These reports would normally drive AUD/USD lower, but investors are laser focused on recovery. Virus cases are extremely low in both countries and New Zealand just lifted its three-day lockdown. The Canadian dollar also shrugged off weaker retail sales. Consumer spending dropped 3.4% at the end of last year, which was worse than the -2.5% forecast.

The euro trailed behind GBP, AUD and NZD but Eurozone's economic reports were the most encouraging. The composite PMI index increased in the month of February thanks to stronger manufacturing activity in Germany and the Eurozone. Services continued to contract, but the strong expansion in manufacturing more than made up the difference. According to the producer price report, inflationary pressures in the Germany increased at the start of the year. With that said, the gains in EUR/USD were modest as the pair hovers underneath the 50-day SMA.