Caxton FX Currency Blog

US second Q2 GDP estimate exceeds expectations

GBP – Sterling recovered against most G10 currencies, even though there was very little support in the form of economic data. Mortgage approvals fell in July as cooling measures introduced in Q2 continued weighing in on the housing market. Gross mortgage borrowing also fell to £10.9bn in July from £11.1bn in the previous month. BoE Governor Carney set out his plans to reduce household indebtedness by firstly limiting the amount mortgage customers can borrow to four and a half times their salary, and secondly by forcing customers to undergo a stress test to ensure that they will still be able to pay even if interest rates change dramatically. As a result, we expect house prices to continue levelling off as housing demand in the UK drops off.  Consumer confidence in the UK improved in August suggesting that there is still optimism surrounding economic recovery in the UK. This week sees the release of PMI manufacturing and construction figures out of the UK. With data having swooped to low levels last month, we expect to see some form of a rebound. If this is the case, we expect to see sterling continue on its current recovery path. The BoE interest rate decision is expected to remain unchanged again, but if we get some central bank comments following the release, it is possible that we could see more significant price action across sterling markets.

USD –  The US dollar maintained a strong position against most currencies last week as economic data flooded out of the nation. The second Q2 GDP estimate exceeded expectation and offered some firm support for the US dollar. Jobless claims also remained below the all-important 300k mark for a second consecutive week, and the reading exceeded expectations for the seventh time in eight readings. US core durable goods declined by 0.8%, but durable goods orders set a monthly record with an increase of 22.6%. US consumer confidence also climbed in August, beating the level that was being anticipated by the market. Housing data showed signs of improvement and contributed to the US dollar gains we saw posted. It is anticipated that momentum in the housing activity will persist till the end of the year and spill into the new build sector, which remains below historical norms, and is currently supported by improving lending conditions and improving income gains. Amid the lack of any data releases this week out of the US, we expect to see fairly muted volatility across US dollar markets unless external factors weigh in on the currency.

EUR –  Euro markets were dominated by the release of some key economic indicators out of Germany. The Gfk Consumer Confidence survey dropped off slightly on the previous month as expected, and this resulted in the euro dropping off slightly across the board. German unemployment figures also offered some support to the euro, as they remained unchanged on the previous month, but this was offset by German CPI figures which posted a flat reading. This created speculation that the headline inflation rate would drop below the level that the market was forecasting. As a result, we saw the GBP/EUR rate edge above the 1.26 mark prior to the release, but quickly correct as the figure came in at the forecasted level. With inflation having dropped by 10 basis points to 0.3% in July, we expect to see speculation start to build that the ECB will go ahead with the ABS purchase programme they are currently discussing. There are more fundamental data releases this week out of both Germany and the eurozone region as a whole. The ECB rate decision later in the week will be the main talking point, although we expect there to be no change. GDP data and PMIs will almost certainly dictate any price action we do see, with downside potential expected to continue outweighing any upside potential.

AUD – The Australian dollar managed to retain some strength against most currencies last week, as RBA Governor Stevens further reiterated the central bank’s neutral stance. He said that the Australian economy needed an injection of confidence rather than lower interest rates. He also warned that the risk of the Australian dollar dropping to lower levels was underestimated. Uncertainty is still surrounding some of the key sectors which make up a large chunk of the nation’s total output, and we therefore expect volatility to remain across Australian dollar markets. There was some support for the Australian dollar upside later in the week, as the leading economic index in China climbed 1.3% in July. Data out of China has dominated the majority of price action we have seen across Australian dollar markets and we expect this to continue. This week will be crucial from an Australian dollar perspective with the release of GDP data and the RBA rates decision. With uncertainty surrounding the RBA’s policy decision, it will be interesting to see whether the central bank release any comments following the announcement of their decision.

End of Week Forecast:

GBP/EUR – 1.2650

GBP/USD –  1.6600

EUR/USD – 1.3100

GBP/AUD –  1.7850

Kamil Amin
FX Analyst
Caxton FX