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

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

Sterling reaches a new 5-year high against the US dollar and a new 21-month high against the euro

GBP – The start of the week saw BoE Governor speak for the first time following the release of the monetary policy minutes last week. Having said a few weeks ago that an earlier than expected interest rate hike was on the cards, it was expected that he would continue building upon his hawkish stance. This was not however the case as he adopted a more cautious approach than the market was expecting, by highlighting that BoE policy makers were happy to wait for the  economy to absorb more slack before tightening policy. It is likely that Carney and the central bank may have lost some credibility as the BoE Governor also mentioned in his speech that his hawkish comments previously were intended to spark a sterling rally specifically because officials wanted sterling markets to reflect more progression in the UK economy. Tenacity was restored to sterling markets towards the back end of the week, as the third Q1 GDP estimate came in at the expected level and the BoE introduced new measures to curb the booming housing market, such as toughening the lending criteria and putting a cap on mortgages. The central bank did make clear that the measures put in place would have no impact on UK economic recovery as well as the central bank’s monetary policy decision and this sparked a mini rally. GBP/USD finished above the 1.70 mark and GBP/EUR remained in touching distance of 1.25. We expect the events from last week to continue pricing in through most of this week as market participants get to grips with the consensus view. There is some PMI data being released throughout the week and with manufacturing still contributing largely to the UK’s total output, we expect some price action if the data falls either side of the forecasted reading.

USD – The US dollar started the week by trading range bound against most of its G10 peers, as uncertainty continued surrounding the medium outlook of the US economy, following dovish comments from the Federal Reserve at their policy meeting last week. Existing homes sales in the US jumped by 4.9% in May, exceeding the forecasted level and increasing at its fastest pace since October 2013. PMI data also showed that the manufacturing sector had expanded more strongly than expected in June, with the growth rate and key sub-indexes advancing to their highest level in more than four years. There was also some added support as US consumer confidence rose in June following a downwardly revised figure in May. With the reading marking the highest level of consumer confidence since January 2008, the US dollar recovered some of last week’s heavy losses. The recovery was however short-lived as the US Q1 GDP figure was revised downwards further from  -1.0% to -2.9%, which was the weakest reading we have seen since the depths of recession in 2009  and will now put some added pressure on Q2 GDP to restore some parity, especially with a return to seasonal temperatures following a harsh winter. With the downward revision already expected, US dollar losses remained fairly muted, as data towards the end of the week showed that income gains had outpaced spending gains which resulted in the saving rate climbing in the US in May.

EUR – The euro has retained some solidarity despite uncertainty still surrounding the effect that easing policy will have on the region’s economic recovery. In terms of economic releases, there was very little support for the single currency as data continues to have no impact on any directional movement we are seeing. PMI figures, for the region as a whole, declined on the month but remained above the 50 level showing signs of consistency. The slowdown in global growth in Q1 has impacted the manufacturing sector, but the new export index in June increased marginally suggesting that export growth is about to stabilize. There have however been signs of readings picking up over the past few months, suggesting that GDP growth in the eurozone will rebound in Q2 following a disappointing 0.2% in Q1. This week is likely to be significant in determining the medium term outlook for the euro against its peers. Early in the week we have inflation and retail sales figures being released, both of which are key economic indicators for the ECB. With inflation having dropped to 0.5% last month, it is essential that the figure doesn’t fall further as this will almost certainly add pressure on the ECB going into their rates decision meeting later in the week. Prior to the meeting we also have some services and manufacturing data being released out of Germany. If the data out of the region’s strongest economy shows signs of growth, we could see volatility being downsized as an element of confidence is restored across euro denominated markets.

AUD – There was some firm support for the Australian dollar at the start of the week as Chinese PMI data showed fresh signs of strength in June, pointing to improvement in the world’s second biggest economy as export demand continues to improve and the government stimulus program takes hold. It is expected that the Chinese economy will continue offering firm support for the Australian dollar especially with the Chinese government stating that they expect the target growth rate of 7.5% to be the minimum level of expansion this year. Comments from RBA Board member, John Edwards, installed further confidence in the outlook of the Australian economy by stating that the nation was capable of withstanding a slump in its mining sector due to the fact that the economy would benefit from infrastructure spending in other sectors and the current low interest rate environment.  With the Australian dollar currently appearing more and more as a safe haven asset, amid the current situation in Iraq and a slowdown in global economic recovery, we expect the Australian dollar to remain at its historically high level for some time. This week is likely to be crucial from an Australian dollar perspective with the release of trade balance figures as well as the all important RBA rates decision meeting. It is highly unlikely that we will see the central bank take any policy action but we expect some further optimism regarding economic growth moving forward.

End of Week Forecast:

GBP/EUR – 1.2480

GBP/USD – 1.7020 

EUR/USD – 1.3640 

GBP/AUD –  1.8100 

Kamil Amin
FX Analyst
Caxton FX