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
