Caxton FX Currency Blog

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