Caxton FX Currency Blog

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