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
FX Analyst
Caxton FX
