Sterling dips below the 1.70 mark against the
US dollar
GBP – Sterling remained
vulnerable to further downward pressure following sizeable outflows the week
before. Amid the lack of any fundamental data releases at the start of the week,
we saw a slight decline across sterling markets as some market participants
cashed in the opportunity to profit take and others remained tentative in
anticipation of the BoE monetary policy meeting minutes release later in the
week. The overall tone of the minutes was more cautious than some had expected
and this resulted in sterling dropping off further against its G10
counterparts. BoE Governor Carney said in his speech shortly after that the UK
economy had continued gaining momentum but face obstacles in its recovery. He
therefore made it clear that tightening policy too soon wouldn’t be viable but
data between now and the end of the year would provide a better indication of
when the central bank should act and by how much. There was more data towards
the end of the week as retail sales figure, the primary gauge of consumer
spending, slipped below the level that the market was anticipating. The
highlight of this week is the release of PMI manufacturing data out of the UK.
With the British Chambers of Commerce having stated that manufacturing data
will drop following a strong Q1, we expect market participants to remain
cautious.
USD – The US dollar found
some much needed strength last week as data showed signs of regaining some
consistency. CPI data, which is the key gauge of inflation, increased by 0.3%
in June as expected, and existing home sales increased by 2.6% from a revised
figure in May. With both inflation and housing data likely to determine how
soon the Federal Reserve take action, we expect to see a large amount of price
action on the back of any further positive sentiment. With core CPI inflation
expected to remain around the 2% level for the rest of this year and 2015, we
could see some pressure start building on the Federal Reserve. Despite this, we
expect Chairman Yellen and other policy makers to remain stubborn and support
the current accommodative monetary stance for some time. This week could be crucial in determining
where we see the US dollar heading in the medium term. The eagerly anticipated
first Q2 GDP estimate will provide a clear indication of how much of the Q1
growth decline of 2.9% was affected by adverse weather conditions at the start
of the year. If we do see a rebound in growth, we expect to see a large degree
of US dollar confidence to return across global markets. Wage growth data
towards the end of the week is also likely to provide some added volatility
with the indicator currently pointing to slack in the labour market.
EUR – The euro again failed
to consolidate any gains against other developed market economies amid the lack
of confidence in the region’s economic recovery. German PPIs came in as
expected and as a result there was very little movement early in the week.
Eurozone consumer confidence declined as expected but manufacturing and
services PMI data showed some signs of strength and this offered some support
for the euro, especially against sterling. The GBP/EUR rate dipped below 1.26
for the first time this month, but quickly recovered as market participants
identified the situation as a good opportunity to buy sterling. With data out
of the region’s strongest economy currently offering little support to the
recovery in the region, we could see further euro outflows. With the current strength
of the euro also weighing in on any progress we have seen thus far, a weaker euro
will almost certainly remove some unnecessary pressure off the ECB and policy
makers. This week sees the release of unemployment and inflation data out of
both Germany and the eurozone region as a whole. With inflation remaining the
key threat to the eurozone economy, we expect to see a large degree of movement
and the possibility of a dramatic shift in momentum if the releases falls
either side of the level that is currently being forecasted by analysts.
AUD – The Australian dollar
started the week with Governor Stevens speaking at an economic conference. He
refused to comment on the strength of the Australian dollar but reiterated that
in order for recovery to continue gathering pace, businesses needed to take
more risk. He also mentioned that the nation’s highly accommodative financial
conditions would have a considerable effect in stimulating real growth. The
year-over-year inflation rate in June rose to 2.9% and is now extremely close
to the top of the RBA’s 2-3% target range. With inflation expected to moderate
in the coming quarters due to sluggish wage growth, upward pressure on the
unemployment and softer domestic demand, we expect the pressure currently on
the RBA to start slowly easing. With very little economic data out of Australia
this week, we expect the Australian dollar to remain fairly range bound but we
could see some further price action if external factors start weighing in on
the the Australian economy.
End of Week Forecast:
GBP/EUR – 1.2630
GBP/USD – 1.6925
EUR/USD – 1.3400
GBP/AUD – 1.8100
Kamil Amin
FX Analyst
Caxton FX
FX Analyst
Caxton FX
