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
FX Analyst
Caxton FX
