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

UK industrial and manufacturing production figures drop off in July

GBP – Sterling had a fairly mixed week as data again failed to show signs of consistency. PMI data, which remains the key gauge of sectors in an economy, improved on the previous month and above the level that the market was forecasting. This resulted in sterling strengthening significantly across the board, notably against the US dollar and the euro. This was fairly short-lived however as manufacturing and industrial production figures fell below the forecasted level and sterling confidence eased off as a result. UK trade deficit also widened further as sterling appreciation weighed in on exports. The all important rates decision failed to deliver anything out of the ordinary as the BoE Kept rates unchanged as expected. This week sees the release of employment data as well as the second Q2 GDP estimate out of the UK. With both employment and growth remaining key components of the BoE’s forward guidance, it is expect that we will see some added volatility through to the end of the week. Growth has remained in line with forecasts and we therefore expect to see sizeable price action if the figure comes in either side of the level that the market is currently anticipating.

USD – The US dollar continued showing signs of strength despite the lack of any data releases out of the US this week. Non-manufacturing PMI increased on the previous month and offered some firm support for the US dollar upside and factory orders also showed signs of improvement. US trade deficit narrowed in June from a revised figure in May, beating market forecasts. The improvement in the nominal balance was mainly down to a 1.2% drop in imports and a marginal increase in exports. Sustained growth at an above potential pace is expected to result in the Federal Reserve fully winding down its asset purchases by October, although the first increase in the base rate is still unlikely until 2015. Data has showed signs of consistency over the past month and this is likely to fuel speculation that the US central bank could act sooner rather than later, but we don’t expect this to be the case. With little data out of the US until the end of the week, we expect to see the US dollar remain vulnerable to further shifts in momentum. PPI data at the end of the week should offer some additional support, with inflation remaining a key component of the Federal Reserve’s forward guidance, but it is difficult to know to what extent.

EUR – With data of the eurozone again showing mixed signs, we expect uncertainty to continue weighing in on the region’s currency.  Retail sales figures remained unchanged on a monthly basis and PMI services dropped off slightly from June’s revised figure. As expected, the ECB left rates unchanged and highlighted their outlook for the economy in the press conference shortly after. President Draghi highlighted that risks to economic recovery in the region were increasing, mainly due to the fact that tensions in Ukraine were showing little signs of easing and economic data had continued to show a lack of consistency. He also mentioned that monetary policy in the eurozone was on a divergent path to that of the UK and the US and that the ECB would continue to progress with its review of a potential asset purchase programme. With the release of CPI and GDP data this week, we expect to see some added volatility as the market weighs up whether or not the ECB will be forced into introducing additional measures. Data has had very little direct impact on the euro since the central bank decision to cut rates in June, but we expect to see more price action this week with inflation remaining the ECB’s current source of forward guidance.

AUD – There was substantial price action across Australian dollar markets as mixed data and central bank comments weighed in on the currency. Retail sales figures increased slightly on the month and trade deficit narrowed on the back of better than expected growth in China. The RBA rate statement revealed that the central bank left rates unchanged at 2.50% for the coming month and retained its neutral bias.  The central bank raised concerns about the effect of a higher exchange rate in the light of lower commodity prices and acknowledged that the recent rise in inflation was caused by a drop in the value of the currency. With wage growth improving, inflation should remain around the 2-3% target and this will offer some comfort to policy makers. Growth is expected to firmer than forecasted but should stabilize below the current trend level over the next year. With a lack of adjustment to the RBA’s forwards guidance, it is likely that we will see rates remain stable for the remainder of the year, with the first hike expected in Q1 2015. With the release of housing data today out of Australia this week, we could see more volatility spikes in the GBP/AUD rate, especially with the housing market remaining a key component of the RBA’s forward guidance.

End of Week Forecast:

GBP/EUR – 1.2610

GBP/USD – 1.6900

EUR/USD – 1.3325

GBP/AUD – 1.8100

Kamil Amin
FX Analyst
Caxton FX

US labour market indicators point to further slack

GBP – Sterling has again posted heavy losses notably against the US dollar amid the lack of any fundamental data releases out of the UK. The Gfk consumer confidence index dropped for the first time in six months having reached a 10-year high in the previous month. With uncertainty creeping into the minds of market participants it now appears as though spending appetite in the UK is also dropping off. A leading broker cut its forecast for the GBP/USD rate on the back of the release, explaining that the BoE could no longer shock the market following some strong central bank comments over the past month. Despite the renewed uncertainty, BoE Deputy Governor Broadbent reiterated towards the that the BoE could still increase interest rates sooner rather than later. With PMI manufacturing data having dropped slightly on the previous month, we expect the market to keep a close eye on this week’s industrial and manufacturing production figures. The BoE rate decision and purchase target does however remain the headline release for the week, despite the fact that we expect both figures to remain unchanged.  

USD – Data out of the US last week offered some firm support for the US dollar, as signs of consistency start to materialise. Consumer confidence figures early in the week exceeded the level that the market was forecasting and improved sizeably on the previous month. The key release for the week was undoubtedly the first Q2 GDP estimate, following a dismal Q1 reading of -2.9%. The release didn’t disappoint as it came in above the level that was priced into the market at 4.0% on an annualized basis. There was however a mini correction at the back end of the week as labour market figures, which remain the current source of forward guidance for the Federal Reserve, weakened slightly on the previous month. Policy makers are still concerned about the amount of labour market slack and we therefore expect to see more significant price action and added volatility prior to any releases moving forward. Amid the lack of any data releases out of the US this week, we expect last week’s US dollar gains remain susceptible to a correction. With speculation that the US central bank could tighten policy sooner than the market is priced in for, we expect some gains to almost certainly be consolidated.

EUR – The Euro had a fairly mixed week on the back of some mixed data releases and external factors weighing in on the currency. Both eurozone economic and industrial confidence figures improved marginally on the previous month and beat market expectations, offering some support for the currency. Inflation figures out of the region’s strongest economy remained unchanged on a monthly basis but dropped off slightly from 0.5% to 0.4% for the region as a whole. With inflation remaining the main threat to the eurozone’s economic recovery and the ECB having reiterated that they would be happy introducing additional measures if needed, it will be interesting to see how the ECB approach their next monetary policy meeting.  The highlight of this week is undoubtedly the ECB rates decision, despite the fact that it is almost certain that there will be no change. Retail sales figures and some fundamental data out of Germany could spark some activity, especially with data out of Germany having a big impact on markets over the past month. With uncertainty still remaining with regards to the economic outlook of the region as a whole, we expect some of last week’s euro gains to be erased, notably against sterling.

AUD – The Australian dollar remained vulnerable for most of last week following weaker than expected inflation figures the week before. The RBA have made it clear that the Australian dollar remains at elevated levels and is not a fair reflection of the current economic situation in the nation. Data out of China has continued offering firm support to the Australian dollar for the majority of the month, more so than any domestic releases. Despite the fact that the IMF stated last week that China could register growth of 7.5% in 2014, while keeping inflation below 3%, it is surprising that we haven’t seen any sizeable Australian dollar inflows. There are still concerns regarding the China’s increasing levels of debt and need for economic reform and as a result we expect Australian dollar bulls to remain sceptical before taking up positions. With the release of consumer spending, trade balance and the all important rates decision today, we expect to see more activity than we did last week. With the RBA still trying to weigh up the effect that low borrowing costs has had on economic recovery in Australia, we don’t expect there to be any change. We could however see some price action if the central bank decide to follow the release with some comments on how they see economy progressing.

End of Week Forecast:

GBP/EUR – 1.2610

GBP/USD – 1.6900

EUR/USD – 1.3400

GBP/AUD – 1.8050

Kamil Amin
FX Analyst
Caxton FX