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

Euro quickly corrects following ECB rates cut announcement

GBP – This week proved to be relatively quiet from a sterling perspective with the BoE keeping both the base rate and the asset purchase target unchanged. There was however some speculation that the BoE could raise rates sooner than expected as the manufacturing sector continued to post strong data in the form of PMI figures. The manufacturing sector currently accounts for around 11% of the UK’s total economic output and has expanded in almost every month since March 2013 and this is likely to a large contributing factor in the decision making of the monetary policy committee in the meeting later this month. Despite sterling appreciation over the past few months having made products less competitive globally and dampened the number of new export orders out of the UK, we expect output to build up some steam in Q3 especially as demand increases globally on the back of strengthening economic recovery. This week sees the release of more manufacturing data as well as employment figures out of the UK. If there continues to be signs of improvement and data exceeding the forecasted levels we could see sterling continue posting gains especially against the euro which has very little in the form of support this week.

USD – The US dollar had another steady week with both the ECB and BoE rates meetings failing to deliver anything that wasn’t already priced into the market. Data out of the US remained fairly inconsistent as the trade balance deficit widening in April as imports increased and exports fell again. It is expected that as long as the domestic expenditure areas of the economy continue to provide evidence of a Q2 rebound in growth, the Federal Reserve will stick to its programme of tapering its asset purchases. If and when this ends, we will also be able to gain a better idea of when rates could be hiked as the US economy embarks on some form of an exit strategy to prevent a knee jerk reaction to the lack of added stimulus. One positive out of US last week was the non manufacturing index which rose to a nine month high in May. The increase reflected gains in business activity, new orders and employment components showing signs that recovery in the US is gathering some pace. This week is expected to be a bit quieter with the release of PPI and retail sales data towards the back end. With inflation still remaining a threat to the US economy, the market will be keeping a close on PPI figures and we are likely to see some activity if there is a sizeable percentage change in either direction.

EUR – Data out of the eurozone at the start of the week almost guaranteed that the ECB would take action on Thursday. Inflation data out of Germany and the eurozone as a whole were down below the forecasted level with CPI data showing that the consumer price inflation increased by the smallest amount in more than four years. The ECB’s dovish tone in recent weeks has kept a lid on euro gains over the past few weeks. Following the ECB’s decision to cut the main refinancing rate by 10 basis points to 0.15% and introduce negative deposit rates we saw both the US dollar and sterling spike against the euro for a short period of time before returning to levels prior to the decision as we saw growing sentiment limit further downside pressure on the back of comments from ECB President Draghi that the euro exchange rate wasn’t a policy target and that the region’s economic recovery is a lot more important than the current levels of inflation. With signs emerging that global economic recovery is not as upbeat as originally thought there is further pressure on the eurozone to show more consistent signs of improving to prevent the euro from dropping off too much. Amid the lack of economic releases this week out of the eurozone we expect the euro to remain fairly vulnerable and we could see weakness emerge on the back of strong data from its developed economy peers.

AUD – The past month has seen a lot of changes take place in the Australia as the economy undergoes reconsolidation and borrowing costs remain at historically low levels. Despite signs of weakness emerging, the Australian dollar has remained historically high even though commodity prices have continued weakening further and the RBA decided to keep the base low at historically low levels for at least another month. Before the rates meeting, there was some mixed data out of the country with trade deficit narrowing to its smallest level in two and a half years and the house price index posting its biggest decline in over five years. Bearing this in mind it was unsurprising that the RBA left rates unchanged with uncertainty still surrounding the effect of the budgetary changes, the recent decline in investment in the mining sector which is still contributes significantly to Australian GDP growth and signs that inflation is heating up. The exchange rate has helped keep a lid on inflation and as a result the RBA have remained tight lipped on the issue but the market will be looking at consumer confidence figures and non-resource industry data even more closely before evaluating the direction of the Australian economy and the underlying strength of its currency. With some important data out of both China and Australia this week we could see some resistance broken especially if we see signs of China improving further with Chinese data currently having a more lasting impact on its neighbouring commodity linked currencies than data out of the countries themselves.

End of Week Forecast:

GBP/EUR – 1.2360

GBP/USD – 1.6820

EUR/USD – 1.3600 

GBP/AUD – 1.7970

Kamil Amin
FX Analyst
Caxton FX

US dollar rally ends on the back of weaker than forecasted annualized GDP figures

GBP – It has been a fairly active week from a sterling perspective despite the lack of any fundamental economic releases.  The week started with further sterling outflows as the modest GDP figures continued to price into the market. BoE Governor Carney’s comments midweek regarding the risks which remain in the nation’s financial sector further fuelled speculation that the underlying strength of the UK economy may not be as the strength of sterling might suggest. With signs of the UK’s housing market also stalling, it is likely that the BoE will continue maintaining its current monetary stance for longer than firstly anticipated. If and when we do see a hike in rates it is likely to be very steady with the BoE concerned that a sizeable increase could backfire. This week sees the release of manufacturing PMI data out of the UK as well house price and trade balance figures. These indicators will provide a better indication of how economic recovery is progressing and should provide extra food for thought going into the BoE rates meeting on Thursday. The meeting minutes should provide the market with some added volatility as the BoE forecast their medium term outlook for the economy and the timeframe in which we should expect to see some form of policy tightening.

USD – The US dollar posted healthy gains this week despite starting the week fairly flat. Durable goods data, which is the key gauge of manufacturing data in the US, despite slipping to a four month low was above the forecasted level and saw the US dollar strengthen reaching a six week high against sterling. The latter part of the week saw the release of revised GDP data which showed that the US economy shrank for the first time in 3 years, increasing the case for the Federal Reserve to main record low borrowing costs to stimulate growth. Despite the weak data, the US dollar climbed to a four month high against sterling and a three month high against the euro before correcting towards the end of Thursday. The correction was caused by inconsistent data in the GDP report which showed that consumer spending, job growth, imports and business investment all increased but exports and personal consumption indicator, which is the key inflation indicator, declined. With Key economic releases out of the US next week in the form of PMI manufacturing and trade balance, it will be interesting to see if the US dollar will continue posting gains against its G10 peers if the data comes in above the forecasted level. With more firm support expected from the quote currencies this week as data from May is released and central bank policy makers meet, we are not expected to see the same degree of volatility we saw last week.

EUR –The week started with ECB President Draghi speaking on the back of German GFK consumer confidence data which remained unchanged on March’s figure. He highlighted that with the eurozone experiencing a prolonged period of inflation and weak lending, the ECB would act sooner rather than later with all possible measures of policy loosening feasible. The start of the week also saw some strong showings by anti-EU parties in the European parliamentary elections but it is difficult to know the impact that this has had on the region’s currency with the ECB currently dominating all euro activity. Similarly, weaker than forecasted German retail sales and unemployment numbers, both key economic indicators, appeared to have little direct impact on the currency following their release as the euro stabilised as we approached the end of the week.  With easing expected on the back of the ECB policy meeting this week, we shouldn’t see much activity heading into the meeting with any fundamental data or ECB comments unlikely to cause any significant movement across the euro denominated markets.

AUD – The Australian dollar had a strong week following recent downward pressure on the back of budgetary changes and comments from the Reserve Bank of Australia (RBA) regarding weakening fundamentals in the country. Despite business investment falling for a second straight quarter as the resources industry slows down, spending in the manufacturing sector increased last month suggesting that the Australian economy is starting to reduce its dependency on the mining sector which is due to experience a decline in investment in the medium term. There was also more new good news in the form of the housing sector, which has been viewed by many as the main support to the economy currently, with new home sales increasing 2.9% last month. With more fundamental data out of Australia this week we could see further activity leading up to the important RBA rates meeting in which we expect no development. With the near term outlook of the Australian economy still pointing to a big downturn in fortune, any strong economic releases should see consumer confidence increase and provide another reason for the RBA to maintain their current monetary stance.

End of Week Forecast:

GBP/EUR – 1.2600 

GBP/USD – 1.6770 

EUR/USD – 1.3580 

GBP/AUD – 1.8160 

Kamil Amin
FX Analyst
Caxton FX