Caxton FX Currency Blog

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