UK inflation edges further away from BoE 2%
target level
GBP – Sterling markets
remained volatile last week as more economic data and central bank comments
weighed in on the currency. The week started with BoE Governor Carney stating
that despite the fact that wage growth remains a key concern for policymakers,
it is not necessarily a pre-requisite for an interest rate hike. On the data
front, UK inflation slipped further away from the BoE’s 2.0% target level to
1.6%, which was well below the level that was being forecasted by the market.
This raised expectations that the BoE would hold interest rates at historically
low levels for a longer period of time, and consequently sterling dropped off
against most of its G10 peers. Inflation has remained a core component of the
BoE’s forward guidance for some time now, and we therefore expect the readings
to continue impacting sterling markets directly, if and when they are released.
Retail sales figures also dropped off slightly in August, with consumer
confidence having been dampened on the back of significant sterling
depreciation since June. Amid the lack of any economic data release this week, we
should see sterling continue remaining vulnerable to further downward pressure.
With sterling having been overvalued over the past few months, on the back of
speculation that the BoE could tighten policy before the end of the year, it
now appears as though we are now seeing the underlying strength of sterling
emerge.
USD – The US dollar
strengthened its position further against its global peers, as optimism
regarding an earlier than expected interest rate hike continued pricing into
the market. July’s inflation figures
rose by 0.1% on the month, following a 0.3% rise in June. The year-over-year
rate moderated slightly to 2.0% from 2.1% in June, although the core annual
rate remained unchanged at 1.9%. Housing data also offered some support as the
number of building permits and housing starts increased modestly on a monthly
basis. After a sharp slowing in building
activity in the South region weighed in on the over pace of housing starts in
June, new home construction has bounced back solidly to reach the highest level
since November 2013. The FOMC minutes midweek also offered some firm support
for the US dollar as a slight hawkish tone emerged from the release. The
minutes revealed that the risks to the outlook for economic activity and labour
market remain balanced, despite the fact that there is persistent weakness in
the housing sector, slowed household income growth and added uncertainty from
geopolitical tensions. This week sees the release of more housing data as well
as durable goods orders figures out of the US. Both sets of data have had a
direct impact on US dollar markets over the past few months, and we therefore
expect to see similar levels of price action.
EUR – The euro remained
vulnerable to further downward pressure last week with data remaining
inconsistent, and geopolitical tensions continuing to weigh in on confidence in
the region. There was very little data
out of the eurozone early in the week and this resulted in the euro dropping
off slightly, notably against sterling and the US dollar. PPI data dropped in
Germany, by more than expected, as energy prices continued to weigh in on the
index. Energy prices fell by 0.6% on the month and 3.2% on the year in July as
tensions between Ukraine and Russia eased. PMI manufacturing and services
figures also dropped off in both Germany and the region as a whole in July on a
monthly basis. With the German economy showing further signs of weakness month
on month, it is unsurprising that we have seen market participants remain so
tentative with regards to taking up euro positions. This week will prove yet again to be a crucial
week from a euro perspective with the release of inflation figures out of both
Germany and the eurozone region as a whole. Inflation levels are likely to
determine whether the ECB will need to introduce additional measure to support
the economy, and we therefore expect to see muted volatility in the build up to
the release.
AUD – The RBA monetary
policy meeting minutes and Governor Stevens’ speech dominated last week’s
proceedings. The minutes revealed that policymakers still believe that there is
a significant degree of uncertainty surrounding the outlook for the Australian
economy. The central bank cut its growth
and inflation forecasts in July, and with wage growth having slowed and
unemployment having climbed, we expect the RBA to continue maintaining an
accommodative policy for some time. The fact that the Australian dollar has
also remained at a historically high level has also offered little support for
what is already a weak economy. The overall tone of the minutes was however a
lot less dovish than most market participants were anticipating and as a result,
we saw the Australian dollar strengthen against most global currencies. There
is again very little in the form of economic data out of Australia this week
and so we expect easing geopolitical tensions, mixed Chinese data and
speculation surrounding an earlier than expected interest rate hike in the US,
to dictate any directional movement we might see across Australian dollar
markets.
End of Week Forecast:
GBP/EUR – 1.2550
GBP/USD – 1.6600
EUR/USD – 1.3150
GBP/AUD – 1.7850
Kamil Amin
FX Analyst
Caxton FX
FX Analyst
Caxton FX
