Strong Inflation and Retail Sales figures are overshadowed by UK GDP increasing in line with expectation and widening government deficit.

GBP – Sterling continued to dominate most of the market movement throughout the week as fundamental economic releases and the BoE Monetary Policy meeting minutes took centre stage. The start of the week was dominated by BoE Governor Carney’s comments regarding the booming UK housing market and how it remained a threat to economic recovery due to its structural problems and the increase in high value loans. This was overshadowed by better than forecasted inflation data (1.8%) which edged closer to the BoE target level (2.0%), highly improved retail sales figures and also increasing signs of hawkish sentiment amongst some BoE Monetary Policy committee members, which fuelled speculation that growth had picked up sizeably on the previous quarter causing sterling to rally against most of its global peers. The rally was however cut short by GDP data from the UK coming in as forecasted, despite the market having priced in an increase and both exports (1.0%) and imports (1.1%) having slipped on the back of sterling appreciation. With no major economic releases this week, we expect sterling to continue on an upward trend against its major peers as long as there is nothing out of the ordinary.

USD – The US dollar started the week trading range bound amid lack of economic releases and following Fed Chairman Yellen’s comments that the US still had a long way to go in order to achieve a sustainable economy. The eagerly anticipated Fed FOMC minutes on Wednesday also failed to deliver any unexpected activity as the central bank confirmed that they would continue tapering their stimulus programme whilst policymakers discussed an exit strategy and further pushed back the likelihood of a hike in rates to the latter parts of next year. The end of the week saw the US dollar strengthen against its major counterparts following promising US housing and manufacturing data both of which were highlighted as threats to the nation’s economic recovery. This week sees the release of more fundamental data out of the US in the form of Durable Goods Orders and CB Consumer Confidence at the start of the week followed by GDP and more Jobless Claims data towards the end of the week. With employment and manufacturing data being two of three key economic indicators in the US currently with regards to forward guidance, we could see some activity if the figures are above the forecasted level as this will continue building pressure on the Federal Reserve with regards to setting a timeframe in which a hike in the base could occur.

EUR – The euro started the weak on a downward curve as weak GDP figures from the eurozone’s core economies continued to price into the market. This further increased speculation that the ECB would take some form of monetary action as early as June whether it be lowering interest rates, introducing negative deposit rates or quantitative easing. With inflation indicators coming in as forecasted and risk of deflation fading slightly, the ECB definitely has time to weigh up different potential options before pulling the trigger. With Draghi speaking at various economic conferences this week, the market will look for further signs of weak economic recovery as the likelihood of monetary loosening sooner rather than later continues to price in. Data out of the eurozone’s strongest economy, Germany, is likely to dominate any market movement once again with employment and consumer confidence figures released midweek.

AUD – The Australian dollar came under pressure at the start of the week as S&P fuelled speculation that the nation’s top notch ratings remained under pressure and the RBA declared that they expected rates to remain at historically low levels for some time. It is also expected that growth in the upcoming quarters is likely to fall behind the trend as exports slow down, investment in the mining sector declines and the government embarks on fiscal consolidation. With the recently released budget signalling spending cuts and a tax hike, there is now added pressure on policymakers as the Australian public takes caution. The Australian dollar did however receive some much needed support towards the end of the week as better than forecasted Chinese PMI data priced into commodity currency markets. This week should continue to be tentative with the Australian dollar remaining range bound against the US dollar and sterling as the market eagerly anticipates next week’s decisive economic releases which will provide a clear indication of the effect of the budgetary changes made by the nation’s government and whether it falls in line with the dovish comments made by the RBA.

End of Week Forecast:

GBP/EUR – 1.2355

GBP/USD – 1.6855

EUR/USD – 1.3670

GBP/AUD – 1.8160

Kamil Amin
FX Analyst
Caxton FX

A week of mixed data leaves Cable stalled in the 1.68’s, the Bank of England’s inflation report underlines the positives of the economic recovery but leaves room for improvement.

A stern warning from Mark Carney in a televised interview this last Sunday has emphasized the focus of the Bank of England on tackling the price increase in UK housing. “When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion, those risks centre in the housing market and that’s why we are focused on that”. The focus was on the possibility of the Financial Policy Committee taking action at their June meeting to reduce the inflation of housing prices by reducing the Help to Buy programme which offers mortgage guarantees to borrowers with small deposits. This Help to Buy programme launched by the government was criticized by economists because it fuelled demand rather than tackling inadequate supply.

UK – The Bank of England released their quarterly inflation report last Wednesday in which they emphasized that interest rates need to stay low for a significant period of time, as an interest rate hike would be a last resort for dealing with the concern of rising housing prices. Carney taking a dovish tone during this meeting undermined the pound, and has helped keep an upward limit on the GBP/EUR and GBP/USD rates. Out of the UK this week, we will have the CPI y/y on Tuesday, votes on the MPC Asset Purchase Facility and the Official Bank Rate as well as retail sales on Wednesday, and a second estimate GDP q/q on Thursday. Positive data this week out of the UK could help to boost the pound across the board, as the pound has had a pullback in the last two weeks or so.

EUR – The Euro has suffered in the wake of the last ECB meeting, as the market is steadily pricing in potential ECB market intervention action at their June meeting. In the last two weeks, EUR/USD has fallen a percent and a half as the Dollar has had a rebound and the euro has suffered. Data from the Eurozone this week to watch out for will be French and German Flash Manufacturing PMI on Thursday and German Ifo Business Climate on Friday. European parliamentary elections will also take place this next Sunday, in which voters from 28 European Union countries will elect 751 members to the European Parliament. Elections can create volatility with a currency, and European Polls show that anti-EU extremist parties from the left as well as the right are expected to gain support as well as parties from Greece and Spain that are opposed to the current EU leadership.

USD – The USD has been holding its current levels and even improved against many currencies, as the Dollar Index is relatively flat from a week ago. The US economic outlook is improved after a disastrous first quarter GDP where there was barely any growth as a result of a harsh North American winter earlier this year. Analysts expect the FOMC meeting minutes on Wednesday evening to reflect the sentiment that the US recovery is underway, but any dovish sentiment from Janet Yellen could further derail the currency. Other US data this week will be Unemployment Claims and Existing Home sales on Thursday and New Home Sales on Friday.

End of Week Forecast:

GBP/EUR – 1.2175 

GBP/USD – 1.6750 

EUR/USD – 1.3650

GBP/AUD – 1.80

Nicholas Ebisch

Corporate Account Manager

Caxton FX

ECB defers action most likely until the next meeting, Cable is stopped at 1.70 but remains elevated.

UK – The United Kingdom performed well over the last week, as Services PMI came in positively on Tuesday, the Bank of England kept the Asset Purchase Facility and the Official Bank Rate the same on Thursday, and Manufacturing Production m/m came in positively on Friday. The positive economic outlook has supported the pound against most currencies in the last week or so, but depending on the data this week, we could see further gains. The relevant data this week will be Mark Carney holding a press conference on Wednesday, followed by a Bank of England Inflation Report. This will provide the BoE’s projection for economic growth and inflation over the next 2 years. Aside from this data, there will not be any major data releases, so the strength of the pound will largely be determined by market trends and speculation until the press conference on Wednesday.

EUR – The European Central bank decided to keep rates on hold for the moment, which provided a momentary spike of strength for the Euro, until Mario Draghi made a comment at the end of the press conference which strongly hinted at ECB action at its June meeting. His comment was that “the governing council is comfortable with acting next time”. This helped to restore confidence in Draghi’s pledge from June 2012 to do “whatever it takes” to save the Eurozone. However, this undermined the value of the Euro, which dropped around a percent against the Pound and the Dollar. The Euro has started the week out on the back foot, and with little data on the week to change this momentum against the Euro, we could see further losses. The only high-impact event coming out of the Eurozone this week will include German ZEW Economic Sentiment on Tuesday. Aside from this, we expect the rate this week to be driven very much by market sentiment.

USD – In the past week, the dollar index has made a significant gain of around one percent due to some positive data over the last week. There has been a reversal of the downward trend of dollar devaluation since the middle of April, as short positions are beginning to unwind and market sentiment is helping to reverse the losses that the dollar suffered. Data from the US this week could help to support the dollar, as it is forecast to come in more positively. The data will start with Core Retail Sales m/m and Retail Sales m/m on Tuesday, PPI m/m on Wednesday, Core CPI m/m, Unemployment Claims, and the Philly Fed manufacturing Index on Thursday, and finally, Building Permits data and Preliminary University of Michigan Consumer Sentiment data on Friday. With this busy week of US data, we could see the dollar go either way, but the dollar is on the front foot for now.

AUD – The Australian dollar gained against sterling and most other currencies last week, as there was much action from the Australian Central bank. The market has speculated that the RBA will soon cut interest rates, but the central bank kept interest rates at 2.50% at the last meeting, lending strength to the AUD. The Unemployment rate also dropped last Thursday in Australia, and the Monetary Policy report came out suggesting a more hawkish tone than expected, that indicators of the economic outlook are “consistent with the pace of growth”. This was a big week for the Australian dollar and it comes into this week with momentum in its favour.

End of week forecast:

GBP/EUR – 1.2275

GBP/USD – 1.68

EUR/USD – 1.37

GBP/AUD – 1.7980

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Cable has peaked out at 1.69, at what seems to be a very high level, but that’s what analysts were saying at 1.61. Eurozone inflation is still the main concern, and with an ECB meeting this next week, we may see some action with the euro.

Global Equity markets have rallied and are approaching record highs yet again going into this week with positive sentiment coming from a slightly improved Eurozone inflation figure, positive non-farm payrolls and the US unemployment rate coming down, Dovish tones from the US Federal Reserve, and the UK economy on a roll with consistently positive economic data. These factors have managed to largely override the uncertainty that is affecting Ukraine and many currency pairings have benefited from the positive data, but the dollar continues to struggle.

UK – Sterling has performed very well in the previous week. The GDP figure came in just below target, but still positive at 0.8% q/q, and manufacturing data was positive on Thursday. The UK economic recovery is gaining momentum, but concern has been expressed by Bank of England policymakers that the rapid recovery of the housing market could be another housing bubble in the making.  The data to watch for this week will be the Official Bank Rate and Asset Purchase Facility, and Manufacturing Production m/m. Things are looking up for the Pound, and there seems to be very little chance that this trend will be reversed.

US – The US recorded a new record low unemployment rate this month at 6.3%, down from 6.7% last month. Also, the US non-farm employment change figures came in very strongly, signalling a recovery in the US labour force. This has helped the Dollar improve against most currencies, as the Dollar suffered earlier in the week with a dismal advance GDP q/q figure this last Tuesday, which was down to 0.1% from 2.6% previously. This week, important US data will include Yellen testifying before the Joint Economic Committee of Congress on Wednesday, and US unemployment claims data on Thursday. With mixed data this week, the dollar is looking for a direction to commit to, and next week’s data may help determine its direction more soundly.

EUR – Analysts are forecasting that the ECB most likely will defer action. Speculation has built before every ECB meeting  that action will be taken, in the form of further interest rate cuts or a new structure for Quantitative Easing, but so far the latest change was last November when there was a surprise interest rate cut. Inflation has picked up in April, but only marginally, from 0.5 to 0.7 percent. The market has begun the week with momentum behind the Euro as analysts are prediction that the ECB will defer possible action this time, and shift market expectation until the June meeting. Other data has been coming in on target, but Eurozone economic growth is still well below policymakers’ expectations. Only time will tell what the ECB has in store, and we will find out for sure this week on Thursday.

End of week forecasts

GBP/EUR – 1.2125

GBP/USD – 1.70

EUR/USD – 1.3950

GBP/AUD – 1.8150

Nicholas Ebisch

Corporate Account Manager

Caxton FX