Sterling drops off against most G10 currencies
amid weak UK economic data
GBP – Sterling activity was
much more muted last week, as the market got to grips with the significant
sterling appreciation we saw the week before.
The currency dropped off slightly on Monday amid the lack of any firm support,
providing investors with an opportunity to take some profit. Following last
week’s strong PMI figures, the market was expect industrial and manufacturing
production to follow a similar trend but this was not the case as both figures
dropped off sizeably on both a monthly and annualized basis. Manufacturing
output posted its largest drop since January 2013 and with the sector having
enjoyed its strongest growth in almost four years in the three months to April,
it is unsurprising that we saw some sterling outflows upon release. Some
strength was restored immediately as the NIESR GDP estimate showed that
economic recovery in the UK has continued gathering momentum and grown at its
fastest pace in more than six years in Q2. The back end of the week saw the BoE
keep both their main refinancing rate and asset purchase target unchanged as
expected. With data likely to determine
how soon the BoE hike rates, we expect to see added volatility upon the release
of any fundamental data. This week sees the release of inflation data out of
the UK in the form of CPIs and PPIs as well as the unemployment rate. With
sterling appreciation putting downward pressure on prices, it is possible that
we could see inflation drop off further from May’s figures. If we do see the
figures come in either side of the forecasted level, we could see sizeable
activity.
USD – US dollar markets
spent most of the week pricing in last week’s comments from Federal Reserve
Chairman, Yellen. On the data front, JOLTS job openings jumped in June from May
and were supported by better than expected jobless claims figures. Despite the
fact that employment data in the US has continued showing signs of strength, we expect any future
improvement to be at a much slower rate than we are currently seeing. There is
also a possibility that other labour market indicators might start pointing to
slack. The main highlight of the week was the Federal Reserve FOMC meeting
minutes. The minutes provided some key information on economic activity in the
US but remained in line with Yellen’s comments last week. The overall view is
that the broad economic outlook continues to evolve in line with the FOMC’s
expectations. There are clear signs that economic activity has picked up
following a weather-related slowdown earlier in the year but the housing market
remains a concern. This week sees the release of Core Retail Sales figures and
PPI data. With inflation and consumer spending remaining key components of the
Federal Reserve forward guidance, it is possible that we could see further activity,
if the data falls either side of the level that the market is priced in for.
EUR – Following last week’s ECB rates decision and
press conference, there was very little in the form of economic releases last
week. German industrial production came in down on the previous month and
posted its sharpest decline since November 2012. With Germany remaining the
main driving force behind the eurozone economy, it is expected that we could
see the euro lose further ground against its peers if data continues missing
the expected level. There was some support for the euro towards the end of the
week as Germany’s trade surplus widened further and CPI figures came in at the
level that was priced into the market. With ECB President Draghi saying last
week the central bank was comfortable implementing unconventional instruments
if necessary, we expect there to be added volatility on the back of the
eurozone CPI data release next week. With the release of industrial production
and the German ZEW surveys, we expect to see a lot more price action than we
have seen over the past week.
AUD – Following last week’s
heavy losses against sterling, the Australian dollar recovered fairly quickly
at the start of the week. Seasonally adjusted performance of construction index
in Australia climbed above 50 in June for the first time in several months, to
show signs of further expansion. Business confidence in Australia improved on
the month despite consumer confidence dropping off. It appears as though firms
are not as concerned with the soft levels of consumer spending as some analysts
had feared. Consumer sentiment in June has increased to its highest level since
last October and unsurprisingly contributed significantly to the Australian
dollar upside. There was some negative sentiment however, towards the end of
the week, as the Australian unemployment rate inched higher from 5.9% in May to
6.0% in June. The level we are currently seeing is the highest in 11 years and
is mainly due to a reduction in full-time payrolls and an increase in the
participation rate. Amid the lack of any fundamental data out of Australia this
week, we expect the Australian dollar to remain vulnerable to any downside
risk.
End of Week Forecast:
GBP/EUR – 1.2610
GBP/USD – 1.7140
EUR/USD – 1.3600
GBP/AUD – 1.8240
Kamil Amin
FX Analyst
Caxton FX
FX Analyst
Caxton FX
