Caxton FX Currency Blog

US dollar rally ends on the back of weaker than forecasted annualized GDP figures

GBP – It has been a fairly active week from a sterling perspective despite the lack of any fundamental economic releases.  The week started with further sterling outflows as the modest GDP figures continued to price into the market. BoE Governor Carney’s comments midweek regarding the risks which remain in the nation’s financial sector further fuelled speculation that the underlying strength of the UK economy may not be as the strength of sterling might suggest. With signs of the UK’s housing market also stalling, it is likely that the BoE will continue maintaining its current monetary stance for longer than firstly anticipated. If and when we do see a hike in rates it is likely to be very steady with the BoE concerned that a sizeable increase could backfire. This week sees the release of manufacturing PMI data out of the UK as well house price and trade balance figures. These indicators will provide a better indication of how economic recovery is progressing and should provide extra food for thought going into the BoE rates meeting on Thursday. The meeting minutes should provide the market with some added volatility as the BoE forecast their medium term outlook for the economy and the timeframe in which we should expect to see some form of policy tightening.

USD – The US dollar posted healthy gains this week despite starting the week fairly flat. Durable goods data, which is the key gauge of manufacturing data in the US, despite slipping to a four month low was above the forecasted level and saw the US dollar strengthen reaching a six week high against sterling. The latter part of the week saw the release of revised GDP data which showed that the US economy shrank for the first time in 3 years, increasing the case for the Federal Reserve to main record low borrowing costs to stimulate growth. Despite the weak data, the US dollar climbed to a four month high against sterling and a three month high against the euro before correcting towards the end of Thursday. The correction was caused by inconsistent data in the GDP report which showed that consumer spending, job growth, imports and business investment all increased but exports and personal consumption indicator, which is the key inflation indicator, declined. With Key economic releases out of the US next week in the form of PMI manufacturing and trade balance, it will be interesting to see if the US dollar will continue posting gains against its G10 peers if the data comes in above the forecasted level. With more firm support expected from the quote currencies this week as data from May is released and central bank policy makers meet, we are not expected to see the same degree of volatility we saw last week.

EUR –The week started with ECB President Draghi speaking on the back of German GFK consumer confidence data which remained unchanged on March’s figure. He highlighted that with the eurozone experiencing a prolonged period of inflation and weak lending, the ECB would act sooner rather than later with all possible measures of policy loosening feasible. The start of the week also saw some strong showings by anti-EU parties in the European parliamentary elections but it is difficult to know the impact that this has had on the region’s currency with the ECB currently dominating all euro activity. Similarly, weaker than forecasted German retail sales and unemployment numbers, both key economic indicators, appeared to have little direct impact on the currency following their release as the euro stabilised as we approached the end of the week.  With easing expected on the back of the ECB policy meeting this week, we shouldn’t see much activity heading into the meeting with any fundamental data or ECB comments unlikely to cause any significant movement across the euro denominated markets.

AUD – The Australian dollar had a strong week following recent downward pressure on the back of budgetary changes and comments from the Reserve Bank of Australia (RBA) regarding weakening fundamentals in the country. Despite business investment falling for a second straight quarter as the resources industry slows down, spending in the manufacturing sector increased last month suggesting that the Australian economy is starting to reduce its dependency on the mining sector which is due to experience a decline in investment in the medium term. There was also more new good news in the form of the housing sector, which has been viewed by many as the main support to the economy currently, with new home sales increasing 2.9% last month. With more fundamental data out of Australia this week we could see further activity leading up to the important RBA rates meeting in which we expect no development. With the near term outlook of the Australian economy still pointing to a big downturn in fortune, any strong economic releases should see consumer confidence increase and provide another reason for the RBA to maintain their current monetary stance.

End of Week Forecast:

GBP/EUR – 1.2600 

GBP/USD – 1.6770 

EUR/USD – 1.3580 

GBP/AUD – 1.8160 

Kamil Amin
FX Analyst
Caxton FX