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
– 1.8160Kamil Amin
FX Analyst
Caxton FX
