Central banks remain in wait-and-see mode

The global Covid-19 situation remains challenging. New global coronavirus cases rose for a ninth consecutive week by a record 5.7 million, as a 52% surge in India outweighed declines in most regions. Still, on a positive note the vaccination drive in Europe is picking up pace and the US has softened its stance on vaccine nationalism, signalling a willingness to export its 60 million AstraZeneca doses, likely to India.

A range of central bank meetings this week brought little change on the policy front. Despite the Fed turning more upbeat on the economy, FedchairPowell reiterated that it is too early to talk about tapering. Based on our very positive US macro outlook, we continue to see the Fed moving in a more hawkish direction later this year when more positive US macro data start to arrive(see Fed Monitor: Review -"It is not the time to start talking about tapering", 28 April). US rates resumed their rise this week after the recent consolidation, while the mood in global equity markets remained constructive, helped by a strong earnings season. EUR/USD rose above 1.21 on the dovish Fed comments. 

The Riksbank did does not rock the boat either. It kept the repo rate path unchanged at zero, left the door open to go negative and re-iterated that the SEK will appreciate only slowly from here, actually raising the trajectory, indicating a somewhat slower appreciation pace, seeFlash Comment Riksbank April 2021, 27 April 2021.

The Bank of Japan(BoJ) kept its QQE with yield curve control unchanged with the target for the short-term interest rate at -0.1% and for 10-year bond yields around 0%. The BoJ also published a new outlook report, where 2023 now marks another year of not reaching the 2% inflation target and the 2021 forecast has been trimmed following new lockdowns in Japan. The FX reaction to the decision was muted but as BoJ added another year of not reaching the inflation target to their outlook, the Yen weakened after four weeks of pure strengthening.

We have taken a deep dive into German politics ahead of the federal election on 26 September. Most importantly, The Green Party is likely to be king-makers in any future governing coalition, opening up the potential for a more relaxed fiscal stance down the line. However, the debt brake will still limit expansionary fiscal policies.

Next week the April US jobs report and ISM manufacturing/services is due for release and we expect strong readings on both. Amore quiet week awaits us in the euro area, where German industrial production figures for March could surprise on the upside given upbeat business surveys and lackluster hard data so far in Q1. The Bank of England(BoE)meeting will not bring significant policy changes in our view, as BoE remains in wait-and-see mode (although updated forecasts on the economy and inflation are released). Instead, it is worth keeping an eye on the Scottish election (as well as UK local elections) on Thursday that could have important implications for the likelihood of another Scottish independence referendum and trigger some volatility in the GBP. In China, we are looking forward to the April Caixin PMI, which could show a rebound due to stronger US exports.

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