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
FX Analyst
Caxton FX
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