Sterling approaches a
five year high against the US dollar following comments from Carney that the
BoE could increase rates sooner rather than later
GBP – With sterling
starting the week relatively strong against both the euro and the US dollar,
despite the BoE keeping the base rate and asset purchase target unchanged, it
was expected that we would see further sterling confidence emerge especially if
economic releases remained consistent. This proved to be the case as data out
of the UK in the form of industrial and manufacturing production rose both on
an annual and monthly basis above the level that the market was expecting evoking
a mini sterling rally despite the sector output falling slightly. There was
more firm support for sterling as the unemployment rate in the UK slipped to a
five year low of 6.6% as employment rose by its largest margin since 1971.
Strong data along with BoE Governor Carney’s comments late on Thursday night
regarding hiking rates sooner rather than later saw sterling edge past last
week’s 18-month high against the euro into the 1.25s and approach a five year
high against the US dollar close to the 1.70 level once again. This week should
prove to be crucial once again with the release of inflation data in the form
of PPI and CPI, retail sales figures and the policy meeting minutes. With
inflation remaining the current source of forward guidance for the BoE, we
expect the data release to have a large influence on the outcome of the MPC
meeting in which the BoE is expected to revise the time frame in which they are
likely increase the base interest rate.
USD – The US dollar started
the week on a fairly quiet note amid the lack of any fundamental data releases
and therefore remained vulnerable to selling pressure with volatility remaining
low and US yields also edging marginally lower. Towards the back end of the
week we saw the release of retail sales figures which rose by less than the
market was anticipating although the previous month’s figure was revised up
slightly. The increase was led by sales increases at auto dealerships, building
material stores and gasoline stations which rose in line with expectation.
Jobless claims also unexpectedly rose on the previous month and this pushed the
four-week moving average higher. With employment remaining a key component of
the Federal Reserve’s forward guidance, it is likely that they will continue winding
down their stimulus package in line with the time frame originally set. On the
US dollar downside, there was some disappointing inflation data released in the
form of PPI which declined both on a monthly and annual basis. With inflation
remaining a threat to US economic recovery it is likely that this will be a
topic of discussion at the FOMC meeting later this week. This week also sees
the release of more inflation data in the form of CPI followed by the eagerly
anticipated FOMC rates meeting and the Federal Reserve Chairman Yellen’s
speech. With the base rate almost
certainly expected to remain unchanged, market participants will be looking
more towards any further hints with regards to a time frame in which the
Federal Reserve could take action.
EUR – There was very little
euro support last week following the ECB’s decision to cut rates the week
before. Industrial output increased across the region, rebounding with a twice as
strong monthly rise in May thanks to energy and non-durable goods production.
The data followed the release of strong eurozone retail sales figures and a
rebound in German industrial orders. Every
economic release had little direct impact on the region’s currency as market
participants remained tentative about the effect of the ECB easing measures on
the single currency economy, especially considering the fact that this is the
first time that the central bank has introduced negative deposit rates. There
was further bad news for the euro as the annual inflation rate weakened
substantially in May to 0.5% across the region and in Germany. With
deflationary pressure remaining the key concern for the ECB, it appears as
though the release of weak CPI figures has somewhat helped justify the central
bank’s decision to take action as early as this month. With no influential data
releases this week, we expect the euro to remain vulnerable and as a result we
could see further losses against both the US dollar and sterling following the
release of the monetary policy meeting minutes out of both nations.
AUD – Last week started
with RBA Governor Stevens highlighting the need for swift sorting of
regulations and banking reforms in order to prevent another financial crisis
occurring. Data out of the nation showed that demand for home loans in the
nation was flat in April along with business confidence as the economy comes to
terms with the recent budgetary changes and shift away from the nation’s dependence
on the resources sector following a drop off in commodity prices. Consumer
confidence also bounced back from a negative result in May as data out of China
continues to remain on the positive side and the ECB’s decision to take action
last week is likely to see further euro outflows flood into high yielding
economies such as Australia which should aid growth and reassure stability.
With very little out of Australia this week we expect external factors to have
a bearing on the direction that the currency takes. With violence looming in
Iraq we expect there to some degree of impact on a number of commodity linked
currencies with the OPEC’s second biggest producer of crude oil plunging deeper
into trouble following seizure of the country’s major oil gateway. Only time
will tell how big an impact the troubles will have on markets but we should see
Australian dollar maintain its strength with the currency appearing more and
more like a safe haven asset.
End of Week Forecast:
GBP/EUR
– 1.2600
GBP/USD
– 1.6980
EUR/USD
– 1.3500
GBP/AUD
– 1.8120
Kamil Amin
FX Analyst
Caxton FX
FX Analyst
Caxton FX
