Scottish referendum voting balance weighs in heavily on sterling markets

GBP –  Sterling markets experienced further shifts in momentum last week, as economic data as well as external factors weighed in heavily on the currency. The highlight of the week was a survey which revealed that support for Scottish independence had risen ahead of this month's referendum. If independence is granted, there will be significant risk posed to sterling, mainly due to the economic and political uncertainty that the split will create. Sterling markets have been largely data driven over the past few months but there are clear signs that this may no longer be the case, especially in the near term, prior to the ballot in two weeks. On the data front, UK PMI data dominated the majority of the price action we saw earlier in the week. PMI manufacturing figures dropped off slightly on a monthly basis, but both PMI construction and services figures exceeded the expected level.  The BoE also decided to keep interest rates and the asset purchase target unchanged this month. Recent data out of the UK has suggested that economic recovery in the UK has continued gathering momentum, but we still expect the BoE to hold off until all the pre-crisis vulnerabilities are fixed before taking action. This week sees the release of industrial and manufacturing figures out of the UK. With the sterling downside remaining vulnerable, we could see further outflows if the figures fall short of market expectations.

USD –  US dollar markets showed further signs of strength last week as external factors weighed in heavily on the currency.  The ECB interest rate cut offered some firm support for US dollar markets, as euro bulls fled for the exits and headed for the world’s reserve currency. US dollar gains were consolidated further by manufacturing data out of the US, which showed that the manufacturing index in the nation had unexpectedly increased in August. The reading actually reached its highest level since March 2011 and came in well above the market forecast. The improvement reflected solid gains in the new orders and production indices, while the employment and supplier delivery components eased off slightly. Non-farm payroll figures did however disappoint and dropped off further from last month’s weak figures. With labour market slack remaining  a key component of the Federal Reserve’s forward guidance, it is unsurprising that we saw some US dollar gains erased. The highlight of the upcoming week is expected to be the release of consumer spending data. With any consumer data remaining a good indicator of how well an economy is progressing, we expect the release to have some impact on US dollar markets.

EUR –  The euro took a dramatic turn for the worse last week, as the ECB surprised the market and cut interest rates further. The main refinancing rate was cut by 10 basis points to 0.05%, and the deposit rate was lowered to -0.2%. ECB President Draghi said in his press conference shortly afterwards that the central bank would purchase a broad portfolio of asset-backed securities starting next month. He also revealed that the policy decision was not unanimous and that some governors wanted further action. The ECB also cut its growth and inflation forecasts, following its assessment of data over the past few months. The GDP forecast has been cut from 1.0% to 0.9% and the inflation forecast from 0.7% to 0.6% in 2014. GDP data out of both Germany and the eurozone region as a whole remained unchanged in August, offering very little support to the euro. PMI services figures also dropped off slightly but German industrial production figures managed to recover slightly. This week sees the release of German inflation figures as well as the ECB monthly report. With any form of euro optimism having been blown away, we expect the euro downside to continue remaining vulnerable moving forward.

AUD – The Australian dollar had an action packed week with the release of growth figures, trade balance data as well as RBA Governor Stevens’ speech. GDP data out of Australia revealed that the Australian economy slowed in Q2 after what was a fairly strong Q1. Australian Bureau of Statistics revealed that net exports were the main drag on growth, posting a drop of 0.9%. Retail sales figures rose for a second consecutive month in July, an optimistic sign of both consumption and economic growth in Q3. The improvement recorded in July and June combined was the strongest since the beginning of the year, indicating that ultra-low interest rates are helping to spur consumer confidence. The RBA Governor Stevens made it clear in his speech that a high exchange rate was weighing in on growth in the nation, and explained how this was likely to continue as long as Chinese growth continues showing signs of reaching the level forecasted at the start of the year. He also reiterated that despite the central bank's desire to see a dramatic drop in the unemployment rate, the RBA was willing to maintain an accommodative policy for some time moving forward.  This week sees the release of unemployment data out of the Australia. With labour market slack remaining a key concern for the RBA, we expect to see sizeable price action on the back of the release.

End of Week Forecast:

GBP/EUR – 1.2400

GBP/USD –  1.6050

EUR/USD – 1.2950

GBP/AUD –  1.7150

Kamil Amin
FX Analyst
Caxton FX

US second Q2 GDP estimate exceeds expectations

GBP – Sterling recovered against most G10 currencies, even though there was very little support in the form of economic data. Mortgage approvals fell in July as cooling measures introduced in Q2 continued weighing in on the housing market. Gross mortgage borrowing also fell to £10.9bn in July from £11.1bn in the previous month. BoE Governor Carney set out his plans to reduce household indebtedness by firstly limiting the amount mortgage customers can borrow to four and a half times their salary, and secondly by forcing customers to undergo a stress test to ensure that they will still be able to pay even if interest rates change dramatically. As a result, we expect house prices to continue levelling off as housing demand in the UK drops off.  Consumer confidence in the UK improved in August suggesting that there is still optimism surrounding economic recovery in the UK. This week sees the release of PMI manufacturing and construction figures out of the UK. With data having swooped to low levels last month, we expect to see some form of a rebound. If this is the case, we expect to see sterling continue on its current recovery path. The BoE interest rate decision is expected to remain unchanged again, but if we get some central bank comments following the release, it is possible that we could see more significant price action across sterling markets.

USD –  The US dollar maintained a strong position against most currencies last week as economic data flooded out of the nation. The second Q2 GDP estimate exceeded expectation and offered some firm support for the US dollar. Jobless claims also remained below the all-important 300k mark for a second consecutive week, and the reading exceeded expectations for the seventh time in eight readings. US core durable goods declined by 0.8%, but durable goods orders set a monthly record with an increase of 22.6%. US consumer confidence also climbed in August, beating the level that was being anticipated by the market. Housing data showed signs of improvement and contributed to the US dollar gains we saw posted. It is anticipated that momentum in the housing activity will persist till the end of the year and spill into the new build sector, which remains below historical norms, and is currently supported by improving lending conditions and improving income gains. Amid the lack of any data releases this week out of the US, we expect to see fairly muted volatility across US dollar markets unless external factors weigh in on the currency.

EUR –  Euro markets were dominated by the release of some key economic indicators out of Germany. The Gfk Consumer Confidence survey dropped off slightly on the previous month as expected, and this resulted in the euro dropping off slightly across the board. German unemployment figures also offered some support to the euro, as they remained unchanged on the previous month, but this was offset by German CPI figures which posted a flat reading. This created speculation that the headline inflation rate would drop below the level that the market was forecasting. As a result, we saw the GBP/EUR rate edge above the 1.26 mark prior to the release, but quickly correct as the figure came in at the forecasted level. With inflation having dropped by 10 basis points to 0.3% in July, we expect to see speculation start to build that the ECB will go ahead with the ABS purchase programme they are currently discussing. There are more fundamental data releases this week out of both Germany and the eurozone region as a whole. The ECB rate decision later in the week will be the main talking point, although we expect there to be no change. GDP data and PMIs will almost certainly dictate any price action we do see, with downside potential expected to continue outweighing any upside potential.

AUD – The Australian dollar managed to retain some strength against most currencies last week, as RBA Governor Stevens further reiterated the central bank’s neutral stance. He said that the Australian economy needed an injection of confidence rather than lower interest rates. He also warned that the risk of the Australian dollar dropping to lower levels was underestimated. Uncertainty is still surrounding some of the key sectors which make up a large chunk of the nation’s total output, and we therefore expect volatility to remain across Australian dollar markets. There was some support for the Australian dollar upside later in the week, as the leading economic index in China climbed 1.3% in July. Data out of China has dominated the majority of price action we have seen across Australian dollar markets and we expect this to continue. This week will be crucial from an Australian dollar perspective with the release of GDP data and the RBA rates decision. With uncertainty surrounding the RBA’s policy decision, it will be interesting to see whether the central bank release any comments following the announcement of their decision.

End of Week Forecast:

GBP/EUR – 1.2650

GBP/USD –  1.6600

EUR/USD – 1.3100

GBP/AUD –  1.7850

Kamil Amin
FX Analyst
Caxton FX

UK inflation edges further away from BoE 2% target level

GBP – Sterling markets remained volatile last week as more economic data and central bank comments weighed in on the currency. The week started with BoE Governor Carney stating that despite the fact that wage growth remains a key concern for policymakers, it is not necessarily a pre-requisite for an interest rate hike. On the data front, UK inflation slipped further away from the BoE’s 2.0% target level to 1.6%, which was well below the level that was being forecasted by the market. This raised expectations that the BoE would hold interest rates at historically low levels for a longer period of time, and consequently sterling dropped off against most of its G10 peers. Inflation has remained a core component of the BoE’s forward guidance for some time now, and we therefore expect the readings to continue impacting sterling markets directly, if and when they are released. Retail sales figures also dropped off slightly in August, with consumer confidence having been dampened on the back of significant sterling depreciation since June. Amid the lack of any economic data release this week, we should see sterling continue remaining vulnerable to further downward pressure. With sterling having been overvalued over the past few months, on the back of speculation that the BoE could tighten policy before the end of the year, it now appears as though we are now seeing the underlying strength of sterling emerge.

USD – The US dollar strengthened its position further against its global peers, as optimism regarding an earlier than expected interest rate hike continued pricing into the market.  July’s inflation figures rose by 0.1% on the month, following a 0.3% rise in June. The year-over-year rate moderated slightly to 2.0% from 2.1% in June, although the core annual rate remained unchanged at 1.9%. Housing data also offered some support as the number of building permits and housing starts increased modestly on a monthly basis.  After a sharp slowing in building activity in the South region weighed in on the over pace of housing starts in June, new home construction has bounced back solidly to reach the highest level since November 2013. The FOMC minutes midweek also offered some firm support for the US dollar as a slight hawkish tone emerged from the release. The minutes revealed that the risks to the outlook for economic activity and labour market remain balanced, despite the fact that there is persistent weakness in the housing sector, slowed household income growth and added uncertainty from geopolitical tensions. This week sees the release of more housing data as well as durable goods orders figures out of the US. Both sets of data have had a direct impact on US dollar markets over the past few months, and we therefore expect to see similar levels of price action.

EUR – The euro remained vulnerable to further downward pressure last week with data remaining inconsistent, and geopolitical tensions continuing to weigh in on confidence in the region.  There was very little data out of the eurozone early in the week and this resulted in the euro dropping off slightly, notably against sterling and the US dollar. PPI data dropped in Germany, by more than expected, as energy prices continued to weigh in on the index. Energy prices fell by 0.6% on the month and 3.2% on the year in July as tensions between Ukraine and Russia eased. PMI manufacturing and services figures also dropped off in both Germany and the region as a whole in July on a monthly basis. With the German economy showing further signs of weakness month on month, it is unsurprising that we have seen market participants remain so tentative with regards to taking up euro positions.  This week will prove yet again to be a crucial week from a euro perspective with the release of inflation figures out of both Germany and the eurozone region as a whole. Inflation levels are likely to determine whether the ECB will need to introduce additional measure to support the economy, and we therefore expect to see muted volatility in the build up to the release.

AUD – The RBA monetary policy meeting minutes and Governor Stevens’ speech dominated last week’s proceedings. The minutes revealed that policymakers still believe that there is a significant degree of uncertainty surrounding the outlook for the Australian economy.  The central bank cut its growth and inflation forecasts in July, and with wage growth having slowed and unemployment having climbed, we expect the RBA to continue maintaining an accommodative policy for some time. The fact that the Australian dollar has also remained at a historically high level has also offered little support for what is already a weak economy. The overall tone of the minutes was however a lot less dovish than most market participants were anticipating and as a result, we saw the Australian dollar strengthen against most global currencies. There is again very little in the form of economic data out of Australia this week and so we expect easing geopolitical tensions, mixed Chinese data and speculation surrounding an earlier than expected interest rate hike in the US, to dictate any directional movement we might see across Australian dollar markets.

End of Week Forecast:

GBP/EUR – 1.2550

GBP/USD – 1.6600

EUR/USD – 1.3150

GBP/AUD – 1.7850

Kamil Amin
FX Analyst
Caxton FX

UK industrial and manufacturing production figures drop off in July

GBP – Sterling had a fairly mixed week as data again failed to show signs of consistency. PMI data, which remains the key gauge of sectors in an economy, improved on the previous month and above the level that the market was forecasting. This resulted in sterling strengthening significantly across the board, notably against the US dollar and the euro. This was fairly short-lived however as manufacturing and industrial production figures fell below the forecasted level and sterling confidence eased off as a result. UK trade deficit also widened further as sterling appreciation weighed in on exports. The all important rates decision failed to deliver anything out of the ordinary as the BoE Kept rates unchanged as expected. This week sees the release of employment data as well as the second Q2 GDP estimate out of the UK. With both employment and growth remaining key components of the BoE’s forward guidance, it is expect that we will see some added volatility through to the end of the week. Growth has remained in line with forecasts and we therefore expect to see sizeable price action if the figure comes in either side of the level that the market is currently anticipating.

USD – The US dollar continued showing signs of strength despite the lack of any data releases out of the US this week. Non-manufacturing PMI increased on the previous month and offered some firm support for the US dollar upside and factory orders also showed signs of improvement. US trade deficit narrowed in June from a revised figure in May, beating market forecasts. The improvement in the nominal balance was mainly down to a 1.2% drop in imports and a marginal increase in exports. Sustained growth at an above potential pace is expected to result in the Federal Reserve fully winding down its asset purchases by October, although the first increase in the base rate is still unlikely until 2015. Data has showed signs of consistency over the past month and this is likely to fuel speculation that the US central bank could act sooner rather than later, but we don’t expect this to be the case. With little data out of the US until the end of the week, we expect to see the US dollar remain vulnerable to further shifts in momentum. PPI data at the end of the week should offer some additional support, with inflation remaining a key component of the Federal Reserve’s forward guidance, but it is difficult to know to what extent.

EUR – With data of the eurozone again showing mixed signs, we expect uncertainty to continue weighing in on the region’s currency.  Retail sales figures remained unchanged on a monthly basis and PMI services dropped off slightly from June’s revised figure. As expected, the ECB left rates unchanged and highlighted their outlook for the economy in the press conference shortly after. President Draghi highlighted that risks to economic recovery in the region were increasing, mainly due to the fact that tensions in Ukraine were showing little signs of easing and economic data had continued to show a lack of consistency. He also mentioned that monetary policy in the eurozone was on a divergent path to that of the UK and the US and that the ECB would continue to progress with its review of a potential asset purchase programme. With the release of CPI and GDP data this week, we expect to see some added volatility as the market weighs up whether or not the ECB will be forced into introducing additional measures. Data has had very little direct impact on the euro since the central bank decision to cut rates in June, but we expect to see more price action this week with inflation remaining the ECB’s current source of forward guidance.

AUD – There was substantial price action across Australian dollar markets as mixed data and central bank comments weighed in on the currency. Retail sales figures increased slightly on the month and trade deficit narrowed on the back of better than expected growth in China. The RBA rate statement revealed that the central bank left rates unchanged at 2.50% for the coming month and retained its neutral bias.  The central bank raised concerns about the effect of a higher exchange rate in the light of lower commodity prices and acknowledged that the recent rise in inflation was caused by a drop in the value of the currency. With wage growth improving, inflation should remain around the 2-3% target and this will offer some comfort to policy makers. Growth is expected to firmer than forecasted but should stabilize below the current trend level over the next year. With a lack of adjustment to the RBA’s forwards guidance, it is likely that we will see rates remain stable for the remainder of the year, with the first hike expected in Q1 2015. With the release of housing data today out of Australia this week, we could see more volatility spikes in the GBP/AUD rate, especially with the housing market remaining a key component of the RBA’s forward guidance.

End of Week Forecast:

GBP/EUR – 1.2610

GBP/USD – 1.6900

EUR/USD – 1.3325

GBP/AUD – 1.8100

Kamil Amin
FX Analyst
Caxton FX

US labour market indicators point to further slack

GBP – Sterling has again posted heavy losses notably against the US dollar amid the lack of any fundamental data releases out of the UK. The Gfk consumer confidence index dropped for the first time in six months having reached a 10-year high in the previous month. With uncertainty creeping into the minds of market participants it now appears as though spending appetite in the UK is also dropping off. A leading broker cut its forecast for the GBP/USD rate on the back of the release, explaining that the BoE could no longer shock the market following some strong central bank comments over the past month. Despite the renewed uncertainty, BoE Deputy Governor Broadbent reiterated towards the that the BoE could still increase interest rates sooner rather than later. With PMI manufacturing data having dropped slightly on the previous month, we expect the market to keep a close eye on this week’s industrial and manufacturing production figures. The BoE rate decision and purchase target does however remain the headline release for the week, despite the fact that we expect both figures to remain unchanged.  

USD – Data out of the US last week offered some firm support for the US dollar, as signs of consistency start to materialise. Consumer confidence figures early in the week exceeded the level that the market was forecasting and improved sizeably on the previous month. The key release for the week was undoubtedly the first Q2 GDP estimate, following a dismal Q1 reading of -2.9%. The release didn’t disappoint as it came in above the level that was priced into the market at 4.0% on an annualized basis. There was however a mini correction at the back end of the week as labour market figures, which remain the current source of forward guidance for the Federal Reserve, weakened slightly on the previous month. Policy makers are still concerned about the amount of labour market slack and we therefore expect to see more significant price action and added volatility prior to any releases moving forward. Amid the lack of any data releases out of the US this week, we expect last week’s US dollar gains remain susceptible to a correction. With speculation that the US central bank could tighten policy sooner than the market is priced in for, we expect some gains to almost certainly be consolidated.

EUR – The Euro had a fairly mixed week on the back of some mixed data releases and external factors weighing in on the currency. Both eurozone economic and industrial confidence figures improved marginally on the previous month and beat market expectations, offering some support for the currency. Inflation figures out of the region’s strongest economy remained unchanged on a monthly basis but dropped off slightly from 0.5% to 0.4% for the region as a whole. With inflation remaining the main threat to the eurozone’s economic recovery and the ECB having reiterated that they would be happy introducing additional measures if needed, it will be interesting to see how the ECB approach their next monetary policy meeting.  The highlight of this week is undoubtedly the ECB rates decision, despite the fact that it is almost certain that there will be no change. Retail sales figures and some fundamental data out of Germany could spark some activity, especially with data out of Germany having a big impact on markets over the past month. With uncertainty still remaining with regards to the economic outlook of the region as a whole, we expect some of last week’s euro gains to be erased, notably against sterling.

AUD – The Australian dollar remained vulnerable for most of last week following weaker than expected inflation figures the week before. The RBA have made it clear that the Australian dollar remains at elevated levels and is not a fair reflection of the current economic situation in the nation. Data out of China has continued offering firm support to the Australian dollar for the majority of the month, more so than any domestic releases. Despite the fact that the IMF stated last week that China could register growth of 7.5% in 2014, while keeping inflation below 3%, it is surprising that we haven’t seen any sizeable Australian dollar inflows. There are still concerns regarding the China’s increasing levels of debt and need for economic reform and as a result we expect Australian dollar bulls to remain sceptical before taking up positions. With the release of consumer spending, trade balance and the all important rates decision today, we expect to see more activity than we did last week. With the RBA still trying to weigh up the effect that low borrowing costs has had on economic recovery in Australia, we don’t expect there to be any change. We could however see some price action if the central bank decide to follow the release with some comments on how they see economy progressing.

End of Week Forecast:

GBP/EUR – 1.2610

GBP/USD – 1.6900

EUR/USD – 1.3400

GBP/AUD – 1.8050

Kamil Amin
FX Analyst
Caxton FX

Sterling dips below the 1.70 mark against the US dollar

GBP – Sterling remained vulnerable to further downward pressure following sizeable outflows the week before. Amid the lack of any fundamental data releases at the start of the week, we saw a slight decline across sterling markets as some market participants cashed in the opportunity to profit take and others remained tentative in anticipation of the BoE monetary policy meeting minutes release later in the week. The overall tone of the minutes was more cautious than some had expected and this resulted in sterling dropping off further against its G10 counterparts. BoE Governor Carney said in his speech shortly after that the UK economy had continued gaining momentum but face obstacles in its recovery. He therefore made it clear that tightening policy too soon wouldn’t be viable but data between now and the end of the year would provide a better indication of when the central bank should act and by how much. There was more data towards the end of the week as retail sales figure, the primary gauge of consumer spending, slipped below the level that the market was anticipating. The highlight of this week is the release of PMI manufacturing data out of the UK. With the British Chambers of Commerce having stated that manufacturing data will drop following a strong Q1, we expect market participants to remain cautious.

USD – The US dollar found some much needed strength last week as data showed signs of regaining some consistency. CPI data, which is the key gauge of inflation, increased by 0.3% in June as expected, and existing home sales increased by 2.6% from a revised figure in May. With both inflation and housing data likely to determine how soon the Federal Reserve take action, we expect to see a large amount of price action on the back of any further positive sentiment. With core CPI inflation expected to remain around the 2% level for the rest of this year and 2015, we could see some pressure start building on the Federal Reserve. Despite this, we expect Chairman Yellen and other policy makers to remain stubborn and support the current accommodative monetary stance for some time.  This week could be crucial in determining where we see the US dollar heading in the medium term. The eagerly anticipated first Q2 GDP estimate will provide a clear indication of how much of the Q1 growth decline of 2.9% was affected by adverse weather conditions at the start of the year. If we do see a rebound in growth, we expect to see a large degree of US dollar confidence to return across global markets. Wage growth data towards the end of the week is also likely to provide some added volatility with the indicator currently pointing to slack in the labour market.

EUR – The euro again failed to consolidate any gains against other developed market economies amid the lack of confidence in the region’s economic recovery. German PPIs came in as expected and as a result there was very little movement early in the week. Eurozone consumer confidence declined as expected but manufacturing and services PMI data showed some signs of strength and this offered some support for the euro, especially against sterling. The GBP/EUR rate dipped below 1.26 for the first time this month, but quickly recovered as market participants identified the situation as a good opportunity to buy sterling. With data out of the region’s strongest economy currently offering little support to the recovery in the region, we could see further euro outflows. With the current strength of the euro also weighing in on any progress we have seen thus far, a weaker euro will almost certainly remove some unnecessary pressure off the ECB and policy makers. This week sees the release of unemployment and inflation data out of both Germany and the eurozone region as a whole. With inflation remaining the key threat to the eurozone economy, we expect to see a large degree of movement and the possibility of a dramatic shift in momentum if the releases falls either side of the level that is currently being forecasted by analysts.

AUD – The Australian dollar started the week with Governor Stevens speaking at an economic conference. He refused to comment on the strength of the Australian dollar but reiterated that in order for recovery to continue gathering pace, businesses needed to take more risk. He also mentioned that the nation’s highly accommodative financial conditions would have a considerable effect in stimulating real growth. The year-over-year inflation rate in June rose to 2.9% and is now extremely close to the top of the RBA’s 2-3% target range. With inflation expected to moderate in the coming quarters due to sluggish wage growth, upward pressure on the unemployment and softer domestic demand, we expect the pressure currently on the RBA to start slowly easing. With very little economic data out of Australia this week, we expect the Australian dollar to remain fairly range bound but we could see some further price action if external factors start weighing in on the the Australian economy.

End of Week Forecast:

GBP/EUR – 1.2630

GBP/USD – 1.6925

EUR/USD – 1.3400

GBP/AUD – 1.8100

Kamil Amin
FX Analyst
Caxton FX

Sterling drops off against most G10 currencies amid weak UK economic data

GBP – Sterling activity was much more muted last week, as the market got to grips with the significant sterling appreciation we saw the week before.  The currency dropped off slightly on Monday amid the lack of any firm support, providing investors with an opportunity to take some profit. Following last week’s strong PMI figures, the market was expect industrial and manufacturing production to follow a similar trend but this was not the case as both figures dropped off sizeably on both a monthly and annualized basis. Manufacturing output posted its largest drop since January 2013 and with the sector having enjoyed its strongest growth in almost four years in the three months to April, it is unsurprising that we saw some sterling outflows upon release. Some strength was restored immediately as the NIESR GDP estimate showed that economic recovery in the UK has continued gathering momentum and grown at its fastest pace in more than six years in Q2. The back end of the week saw the BoE keep both their main refinancing rate and asset purchase target unchanged as expected.  With data likely to determine how soon the BoE hike rates, we expect to see added volatility upon the release of any fundamental data. This week sees the release of inflation data out of the UK in the form of CPIs and PPIs as well as the unemployment rate. With sterling appreciation putting downward pressure on prices, it is possible that we could see inflation drop off further from May’s figures. If we do see the figures come in either side of the forecasted level, we could see sizeable activity.

USD – US dollar markets spent most of the week pricing in last week’s comments from Federal Reserve Chairman, Yellen. On the data front, JOLTS job openings jumped in June from May and were supported by better than expected jobless claims figures. Despite the fact that employment data in the US has continued showing  signs of strength, we expect any future improvement to be at a much slower rate than we are currently seeing. There is also a possibility that other labour market indicators might start pointing to slack. The main highlight of the week was the Federal Reserve FOMC meeting minutes. The minutes provided some key information on economic activity in the US but remained in line with Yellen’s comments last week. The overall view is that the broad economic outlook continues to evolve in line with the FOMC’s expectations. There are clear signs that economic activity has picked up following a weather-related slowdown earlier in the year but the housing market remains a concern. This week sees the release of Core Retail Sales figures and PPI data. With inflation and consumer spending remaining key components of the Federal Reserve forward guidance, it is possible that we could see further activity, if the data falls either side of the level that the market is priced in for.

EUR –  Following last week’s ECB rates decision and press conference, there was very little in the form of economic releases last week. German industrial production came in down on the previous month and posted its sharpest decline since November 2012. With Germany remaining the main driving force behind the eurozone economy, it is expected that we could see the euro lose further ground against its peers if data continues missing the expected level. There was some support for the euro towards the end of the week as Germany’s trade surplus widened further and CPI figures came in at the level that was priced into the market. With ECB President Draghi saying last week the central bank was comfortable implementing unconventional instruments if necessary, we expect there to be added volatility on the back of the eurozone CPI data release next week. With the release of industrial production and the German ZEW surveys, we expect to see a lot more price action than we have seen over the past week.

AUD – Following last week’s heavy losses against sterling, the Australian dollar recovered fairly quickly at the start of the week. Seasonally adjusted performance of construction index in Australia climbed above 50 in June for the first time in several months, to show signs of further expansion. Business confidence in Australia improved on the month despite consumer confidence dropping off. It appears as though firms are not as concerned with the soft levels of consumer spending as some analysts had feared. Consumer sentiment in June has increased to its highest level since last October and unsurprisingly contributed significantly to the Australian dollar upside. There was some negative sentiment however, towards the end of the week, as the Australian unemployment rate inched higher from 5.9% in May to 6.0% in June. The level we are currently seeing is the highest in 11 years and is mainly due to a reduction in full-time payrolls and an increase in the participation rate. Amid the lack of any fundamental data out of Australia this week, we expect the Australian dollar to remain vulnerable to any downside risk.

End of Week Forecast:

GBP/EUR – 1.2610 

GBP/USD – 1.7140 

EUR/USD – 1.3600 

GBP/AUD – 1.8240 

Kamil Amin
FX Analyst
Caxton FX

Sterling reaches a new 5-year high against the US dollar and a new 21-month high against the euro

GBP – The start of the week saw BoE Governor speak for the first time following the release of the monetary policy minutes last week. Having said a few weeks ago that an earlier than expected interest rate hike was on the cards, it was expected that he would continue building upon his hawkish stance. This was not however the case as he adopted a more cautious approach than the market was expecting, by highlighting that BoE policy makers were happy to wait for the  economy to absorb more slack before tightening policy. It is likely that Carney and the central bank may have lost some credibility as the BoE Governor also mentioned in his speech that his hawkish comments previously were intended to spark a sterling rally specifically because officials wanted sterling markets to reflect more progression in the UK economy. Tenacity was restored to sterling markets towards the back end of the week, as the third Q1 GDP estimate came in at the expected level and the BoE introduced new measures to curb the booming housing market, such as toughening the lending criteria and putting a cap on mortgages. The central bank did make clear that the measures put in place would have no impact on UK economic recovery as well as the central bank’s monetary policy decision and this sparked a mini rally. GBP/USD finished above the 1.70 mark and GBP/EUR remained in touching distance of 1.25. We expect the events from last week to continue pricing in through most of this week as market participants get to grips with the consensus view. There is some PMI data being released throughout the week and with manufacturing still contributing largely to the UK’s total output, we expect some price action if the data falls either side of the forecasted reading.

USD – The US dollar started the week by trading range bound against most of its G10 peers, as uncertainty continued surrounding the medium outlook of the US economy, following dovish comments from the Federal Reserve at their policy meeting last week. Existing homes sales in the US jumped by 4.9% in May, exceeding the forecasted level and increasing at its fastest pace since October 2013. PMI data also showed that the manufacturing sector had expanded more strongly than expected in June, with the growth rate and key sub-indexes advancing to their highest level in more than four years. There was also some added support as US consumer confidence rose in June following a downwardly revised figure in May. With the reading marking the highest level of consumer confidence since January 2008, the US dollar recovered some of last week’s heavy losses. The recovery was however short-lived as the US Q1 GDP figure was revised downwards further from  -1.0% to -2.9%, which was the weakest reading we have seen since the depths of recession in 2009  and will now put some added pressure on Q2 GDP to restore some parity, especially with a return to seasonal temperatures following a harsh winter. With the downward revision already expected, US dollar losses remained fairly muted, as data towards the end of the week showed that income gains had outpaced spending gains which resulted in the saving rate climbing in the US in May.

EUR – The euro has retained some solidarity despite uncertainty still surrounding the effect that easing policy will have on the region’s economic recovery. In terms of economic releases, there was very little support for the single currency as data continues to have no impact on any directional movement we are seeing. PMI figures, for the region as a whole, declined on the month but remained above the 50 level showing signs of consistency. The slowdown in global growth in Q1 has impacted the manufacturing sector, but the new export index in June increased marginally suggesting that export growth is about to stabilize. There have however been signs of readings picking up over the past few months, suggesting that GDP growth in the eurozone will rebound in Q2 following a disappointing 0.2% in Q1. This week is likely to be significant in determining the medium term outlook for the euro against its peers. Early in the week we have inflation and retail sales figures being released, both of which are key economic indicators for the ECB. With inflation having dropped to 0.5% last month, it is essential that the figure doesn’t fall further as this will almost certainly add pressure on the ECB going into their rates decision meeting later in the week. Prior to the meeting we also have some services and manufacturing data being released out of Germany. If the data out of the region’s strongest economy shows signs of growth, we could see volatility being downsized as an element of confidence is restored across euro denominated markets.

AUD – There was some firm support for the Australian dollar at the start of the week as Chinese PMI data showed fresh signs of strength in June, pointing to improvement in the world’s second biggest economy as export demand continues to improve and the government stimulus program takes hold. It is expected that the Chinese economy will continue offering firm support for the Australian dollar especially with the Chinese government stating that they expect the target growth rate of 7.5% to be the minimum level of expansion this year. Comments from RBA Board member, John Edwards, installed further confidence in the outlook of the Australian economy by stating that the nation was capable of withstanding a slump in its mining sector due to the fact that the economy would benefit from infrastructure spending in other sectors and the current low interest rate environment.  With the Australian dollar currently appearing more and more as a safe haven asset, amid the current situation in Iraq and a slowdown in global economic recovery, we expect the Australian dollar to remain at its historically high level for some time. This week is likely to be crucial from an Australian dollar perspective with the release of trade balance figures as well as the all important RBA rates decision meeting. It is highly unlikely that we will see the central bank take any policy action but we expect some further optimism regarding economic growth moving forward.

End of Week Forecast:

GBP/EUR – 1.2480

GBP/USD – 1.7020 

EUR/USD – 1.3640 

GBP/AUD –  1.8100 

Kamil Amin
FX Analyst
Caxton FX

Sterling finally breaks through the 1.70 resistance against the US dollar and maintains its position

GBP – The start of the week saw sterling maintain its strong position as BoE Deputy Governor Bean highlighted that there is optimism surrounding the current state of economic recovery and that there was a better balance in the UK financial system. He also stated that if and when we do see policy tightened, it will be a clear indication that the economy is back on track to being normalized again. On the data front, the consumer price index, which is a key gauge of inflation, slipped to a four and a half year low after the first year-on-year fall in food prices since 2006. With the UK economy growing at such a fast pace, low inflation has allowed the BoE to keep interest rates at a historically low 0.5%. The BoE did mention in their policy meeting minutes that inflation was not a concern due to the fact that sterling appreciation putting downward pressure on prices was the main reason behind the decline we have seen since April. With the outlook for the UK economy remaining positive, it is not surprising that the BoE policy meeting minutes showed that the policy decision remains balanced. With the central bank reiterating that they would act cautiously and that any hike in rates would be gradual, it appears even more likely that we could see some policy tightening before the end of the year. On the back of the positive sentiment out of policy meeting minutes, sterling finally broke the 1.70 resistance level against the US dollar and carried on to reach a new 5-year high. This week sees the release of UK GDP and current account figures. With growth in the UK on track to be the fastest-growing among the Group of Seven nations this year, we should see further sterling appreciation and it will be then down to the BoE to act accordingly. It will be important for policy makers to ensure that the currency doesn’t pull too far away from its peers but also allow the economy to start supporting itself again.

USD – The US dollar started the week rather tentative as market participants tried to evaluate the outcome of the FOMC meeting which took place on Wednesday.  There were further signs of economic recovery picking up as the nation’s industrial output increased for the third time in four months as US factories boosted production. The US consumer price index also increased by a stronger than expected 0.4% in May, above the forecasted level of 0.2%. The year-on-year rate of growth increased to 2.0%, which was which is the highest rate we have seen since early 2013. Despite the economic backdrop showing signs of improvement, there remains a significant amount of slack in the economy and consequently the Federal Reserve continued maintaining a dovish outlook following the FOMC meeting last week and hinted that interest rates are likely to remain historically low beyond tapering for some time. The Federal Reserve also revised the growth, unemployment and inflation forecasts for the year on the back of recent economic releases. This week sees the release of GDP data out of the US along with consumer confidence figures and durable goods orders. Many recent indicators have suggested that a rebound in consumer confidence and spending as well as production is already under way, putting the economy on track for improved growth on Q1. If we see signs of improvement, there is likely to be some upward pressure on the US dollar, as some hawkish sentiment returns to US dollar markets.

EUR – There was more downward pressure exerted on the euro at the start of the week as Eurostat showed that the headline inflation rate had plunged to 0.5% in May,  both on an annual and seasonally adjusted basis. Inflation in the region is currently at its lowest level since November 2009 and further justifies the ECB’s decision to take action as early as June.  With inflation indicators remaining significantly below the 2% target level for some time and the 1% level since November 2013, it will be more difficult for customers, governments and companies to reduce their debt levels. The German ZEW Economic Sentiment survey continued to decline and fell short of the estimate whilst the same survey for the region as a whole also fell below the forecasted level. It was expected that we would see a drop in confidence following the uncertainty surrounding the effect that negative deposit rates and a cut in the main refinancing rate will have on the economy. If inflation indicators in the eurozone don’t show signs of substantial improvement, the ECB will be under pressure to take stronger monetary measure at its July meeting and this could result in the euro falling to an unsustainable level. This week sees the release of important PMI services and manufacturing data out of the eurozone. With data currently having very little impact on the single currency, we expect the quote currencies to dominate any activity we may see in euro markets with uncertainty still playing on the minds of investors due to the vulnerability of the economic situation across the region.

AUD – The RBA stated at the start of last week that its current accommodative policy appears to be appropriate for some time and that low borrowing costs have helped support demand. It is expected that Australian GDP will grow below the normal level next year, as the economy gets to grips with fiscal consolidation and a decline in foreign investment, while inflation is expected to remain within the targeted levels. The central bank have said that it is difficult to gauge how much borrowing costs can offset a drop in investments of the mining sector and government spending cuts, especially with the Australian dollar remaining at historically high levels and not providing the assistance needed to rebalance growth. With Iron ore prices having fallen by 34% this year and the Australian dollar index, the nation’s main commodity index, by 9.5%, is appears as though there is still plenty of downside risk remaining, especially with Chinese growth expected to fall short of its target level this year. Amid the lack of any key data this week out of Australia, we expect the situation in Iraq to have a big say on any activity we are likely to see. With the Australian dollar looking more and more like a safe haven currency but the violence in Iraq putting pressure on commodity linked currencies, it will be interesting to see the positions which market participants take up with uncertainty building.

End of Week Forecast:

GBP/EUR – 1.2540

GBP/USD – 1.7050

EUR/USD – 1.3640

GBP/AUD –  1.8120

Kamil Amin
FX Analyst
Caxton FX

Sterling approaches a five year high against the US dollar following comments from Carney that the BoE could increase rates sooner rather than later

GBP – With sterling starting the week relatively strong against both the euro and the US dollar, despite the BoE keeping the base rate and asset purchase target unchanged, it was expected that we would see further sterling confidence emerge especially if economic releases remained consistent. This proved to be the case as data out of the UK in the form of industrial and manufacturing production rose both on an annual and monthly basis above the level that the market was expecting evoking a mini sterling rally despite the sector output falling slightly. There was more firm support for sterling as the unemployment rate in the UK slipped to a five year low of 6.6% as employment rose by its largest margin since 1971. Strong data along with BoE Governor Carney’s comments late on Thursday night regarding hiking rates sooner rather than later saw sterling edge past last week’s 18-month high against the euro into the 1.25s and approach a five year high against the US dollar close to the 1.70 level once again. This week should prove to be crucial once again with the release of inflation data in the form of PPI and CPI, retail sales figures and the policy meeting minutes. With inflation remaining the current source of forward guidance for the BoE, we expect the data release to have a large influence on the outcome of the MPC meeting in which the BoE is expected to revise the time frame in which they are likely increase the base interest rate.

USD – The US dollar started the week on a fairly quiet note amid the lack of any fundamental data releases and therefore remained vulnerable to selling pressure with volatility remaining low and US yields also edging marginally lower. Towards the back end of the week we saw the release of retail sales figures which rose by less than the market was anticipating although the previous month’s figure was revised up slightly. The increase was led by sales increases at auto dealerships, building material stores and gasoline stations which rose in line with expectation. Jobless claims also unexpectedly rose on the previous month and this pushed the four-week moving average higher. With employment remaining a key component of the Federal Reserve’s forward guidance, it is likely that they will continue winding down their stimulus package in line with the time frame originally set. On the US dollar downside, there was some disappointing inflation data released in the form of PPI which declined both on a monthly and annual basis. With inflation remaining a threat to US economic recovery it is likely that this will be a topic of discussion at the FOMC meeting later this week. This week also sees the release of more inflation data in the form of CPI followed by the eagerly anticipated FOMC rates meeting and the Federal Reserve Chairman Yellen’s speech.  With the base rate almost certainly expected to remain unchanged, market participants will be looking more towards any further hints with regards to a time frame in which the Federal Reserve could take action.

EUR – There was very little euro support last week following the ECB’s decision to cut rates the week before. Industrial output increased across the region, rebounding with a twice as strong monthly rise in May thanks to energy and non-durable goods production. The data followed the release of strong eurozone retail sales figures and a rebound in German industrial orders.  Every economic release had little direct impact on the region’s currency as market participants remained tentative about the effect of the ECB easing measures on the single currency economy, especially considering the fact that this is the first time that the central bank has introduced negative deposit rates. There was further bad news for the euro as the annual inflation rate weakened substantially in May to 0.5% across the region and in Germany. With deflationary pressure remaining the key concern for the ECB, it appears as though the release of weak CPI figures has somewhat helped justify the central bank’s decision to take action as early as this month. With no influential data releases this week, we expect the euro to remain vulnerable and as a result we could see further losses against both the US dollar and sterling following the release of the monetary policy meeting minutes out of both nations.

AUD – Last week started with RBA Governor Stevens highlighting the need for swift sorting of regulations and banking reforms in order to prevent another financial crisis occurring. Data out of the nation showed that demand for home loans in the nation was flat in April along with business confidence as the economy comes to terms with the recent budgetary changes and shift away from the nation’s dependence on the resources sector following a drop off in commodity prices. Consumer confidence also bounced back from a negative result in May as data out of China continues to remain on the positive side and the ECB’s decision to take action last week is likely to see further euro outflows flood into high yielding economies such as Australia which should aid growth and reassure stability. With very little out of Australia this week we expect external factors to have a bearing on the direction that the currency takes. With violence looming in Iraq we expect there to some degree of impact on a number of commodity linked currencies with the OPEC’s second biggest producer of crude oil plunging deeper into trouble following seizure of the country’s major oil gateway. Only time will tell how big an impact the troubles will have on markets but we should see Australian dollar maintain its strength with the currency appearing more and more like a safe haven asset.

End of Week Forecast:

GBP/EUR – 1.2600

GBP/USD – 1.6980

EUR/USD – 1.3500

GBP/AUD – 1.8120

Kamil Amin
FX Analyst
Caxton FX