Sterling dips below the 1.70 mark against the US dollar

GBP – Sterling remained vulnerable to further downward pressure following sizeable outflows the week before. Amid the lack of any fundamental data releases at the start of the week, we saw a slight decline across sterling markets as some market participants cashed in the opportunity to profit take and others remained tentative in anticipation of the BoE monetary policy meeting minutes release later in the week. The overall tone of the minutes was more cautious than some had expected and this resulted in sterling dropping off further against its G10 counterparts. BoE Governor Carney said in his speech shortly after that the UK economy had continued gaining momentum but face obstacles in its recovery. He therefore made it clear that tightening policy too soon wouldn’t be viable but data between now and the end of the year would provide a better indication of when the central bank should act and by how much. There was more data towards the end of the week as retail sales figure, the primary gauge of consumer spending, slipped below the level that the market was anticipating. The highlight of this week is the release of PMI manufacturing data out of the UK. With the British Chambers of Commerce having stated that manufacturing data will drop following a strong Q1, we expect market participants to remain cautious.

USD – The US dollar found some much needed strength last week as data showed signs of regaining some consistency. CPI data, which is the key gauge of inflation, increased by 0.3% in June as expected, and existing home sales increased by 2.6% from a revised figure in May. With both inflation and housing data likely to determine how soon the Federal Reserve take action, we expect to see a large amount of price action on the back of any further positive sentiment. With core CPI inflation expected to remain around the 2% level for the rest of this year and 2015, we could see some pressure start building on the Federal Reserve. Despite this, we expect Chairman Yellen and other policy makers to remain stubborn and support the current accommodative monetary stance for some time.  This week could be crucial in determining where we see the US dollar heading in the medium term. The eagerly anticipated first Q2 GDP estimate will provide a clear indication of how much of the Q1 growth decline of 2.9% was affected by adverse weather conditions at the start of the year. If we do see a rebound in growth, we expect to see a large degree of US dollar confidence to return across global markets. Wage growth data towards the end of the week is also likely to provide some added volatility with the indicator currently pointing to slack in the labour market.

EUR – The euro again failed to consolidate any gains against other developed market economies amid the lack of confidence in the region’s economic recovery. German PPIs came in as expected and as a result there was very little movement early in the week. Eurozone consumer confidence declined as expected but manufacturing and services PMI data showed some signs of strength and this offered some support for the euro, especially against sterling. The GBP/EUR rate dipped below 1.26 for the first time this month, but quickly recovered as market participants identified the situation as a good opportunity to buy sterling. With data out of the region’s strongest economy currently offering little support to the recovery in the region, we could see further euro outflows. With the current strength of the euro also weighing in on any progress we have seen thus far, a weaker euro will almost certainly remove some unnecessary pressure off the ECB and policy makers. This week sees the release of unemployment and inflation data out of both Germany and the eurozone region as a whole. With inflation remaining the key threat to the eurozone economy, we expect to see a large degree of movement and the possibility of a dramatic shift in momentum if the releases falls either side of the level that is currently being forecasted by analysts.

AUD – The Australian dollar started the week with Governor Stevens speaking at an economic conference. He refused to comment on the strength of the Australian dollar but reiterated that in order for recovery to continue gathering pace, businesses needed to take more risk. He also mentioned that the nation’s highly accommodative financial conditions would have a considerable effect in stimulating real growth. The year-over-year inflation rate in June rose to 2.9% and is now extremely close to the top of the RBA’s 2-3% target range. With inflation expected to moderate in the coming quarters due to sluggish wage growth, upward pressure on the unemployment and softer domestic demand, we expect the pressure currently on the RBA to start slowly easing. With very little economic data out of Australia this week, we expect the Australian dollar to remain fairly range bound but we could see some further price action if external factors start weighing in on the the Australian economy.

End of Week Forecast:

GBP/EUR – 1.2630

GBP/USD – 1.6925

EUR/USD – 1.3400

GBP/AUD – 1.8100

Kamil Amin
FX Analyst
Caxton FX

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

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

Sterling finally breaks through the 1.70 resistance against the US dollar and maintains its position

GBP – The start of the week saw sterling maintain its strong position as BoE Deputy Governor Bean highlighted that there is optimism surrounding the current state of economic recovery and that there was a better balance in the UK financial system. He also stated that if and when we do see policy tightened, it will be a clear indication that the economy is back on track to being normalized again. On the data front, the consumer price index, which is a key gauge of inflation, slipped to a four and a half year low after the first year-on-year fall in food prices since 2006. With the UK economy growing at such a fast pace, low inflation has allowed the BoE to keep interest rates at a historically low 0.5%. The BoE did mention in their policy meeting minutes that inflation was not a concern due to the fact that sterling appreciation putting downward pressure on prices was the main reason behind the decline we have seen since April. With the outlook for the UK economy remaining positive, it is not surprising that the BoE policy meeting minutes showed that the policy decision remains balanced. With the central bank reiterating that they would act cautiously and that any hike in rates would be gradual, it appears even more likely that we could see some policy tightening before the end of the year. On the back of the positive sentiment out of policy meeting minutes, sterling finally broke the 1.70 resistance level against the US dollar and carried on to reach a new 5-year high. This week sees the release of UK GDP and current account figures. With growth in the UK on track to be the fastest-growing among the Group of Seven nations this year, we should see further sterling appreciation and it will be then down to the BoE to act accordingly. It will be important for policy makers to ensure that the currency doesn’t pull too far away from its peers but also allow the economy to start supporting itself again.

USD – The US dollar started the week rather tentative as market participants tried to evaluate the outcome of the FOMC meeting which took place on Wednesday.  There were further signs of economic recovery picking up as the nation’s industrial output increased for the third time in four months as US factories boosted production. The US consumer price index also increased by a stronger than expected 0.4% in May, above the forecasted level of 0.2%. The year-on-year rate of growth increased to 2.0%, which was which is the highest rate we have seen since early 2013. Despite the economic backdrop showing signs of improvement, there remains a significant amount of slack in the economy and consequently the Federal Reserve continued maintaining a dovish outlook following the FOMC meeting last week and hinted that interest rates are likely to remain historically low beyond tapering for some time. The Federal Reserve also revised the growth, unemployment and inflation forecasts for the year on the back of recent economic releases. This week sees the release of GDP data out of the US along with consumer confidence figures and durable goods orders. Many recent indicators have suggested that a rebound in consumer confidence and spending as well as production is already under way, putting the economy on track for improved growth on Q1. If we see signs of improvement, there is likely to be some upward pressure on the US dollar, as some hawkish sentiment returns to US dollar markets.

EUR – There was more downward pressure exerted on the euro at the start of the week as Eurostat showed that the headline inflation rate had plunged to 0.5% in May,  both on an annual and seasonally adjusted basis. Inflation in the region is currently at its lowest level since November 2009 and further justifies the ECB’s decision to take action as early as June.  With inflation indicators remaining significantly below the 2% target level for some time and the 1% level since November 2013, it will be more difficult for customers, governments and companies to reduce their debt levels. The German ZEW Economic Sentiment survey continued to decline and fell short of the estimate whilst the same survey for the region as a whole also fell below the forecasted level. It was expected that we would see a drop in confidence following the uncertainty surrounding the effect that negative deposit rates and a cut in the main refinancing rate will have on the economy. If inflation indicators in the eurozone don’t show signs of substantial improvement, the ECB will be under pressure to take stronger monetary measure at its July meeting and this could result in the euro falling to an unsustainable level. This week sees the release of important PMI services and manufacturing data out of the eurozone. With data currently having very little impact on the single currency, we expect the quote currencies to dominate any activity we may see in euro markets with uncertainty still playing on the minds of investors due to the vulnerability of the economic situation across the region.

AUD – The RBA stated at the start of last week that its current accommodative policy appears to be appropriate for some time and that low borrowing costs have helped support demand. It is expected that Australian GDP will grow below the normal level next year, as the economy gets to grips with fiscal consolidation and a decline in foreign investment, while inflation is expected to remain within the targeted levels. The central bank have said that it is difficult to gauge how much borrowing costs can offset a drop in investments of the mining sector and government spending cuts, especially with the Australian dollar remaining at historically high levels and not providing the assistance needed to rebalance growth. With Iron ore prices having fallen by 34% this year and the Australian dollar index, the nation’s main commodity index, by 9.5%, is appears as though there is still plenty of downside risk remaining, especially with Chinese growth expected to fall short of its target level this year. Amid the lack of any key data this week out of Australia, we expect the situation in Iraq to have a big say on any activity we are likely to see. With the Australian dollar looking more and more like a safe haven currency but the violence in Iraq putting pressure on commodity linked currencies, it will be interesting to see the positions which market participants take up with uncertainty building.

End of Week Forecast:

GBP/EUR – 1.2540

GBP/USD – 1.7050

EUR/USD – 1.3640

GBP/AUD –  1.8120

Kamil Amin
FX Analyst
Caxton FX

Sterling approaches a five year high against the US dollar following comments from Carney that the BoE could increase rates sooner rather than later

GBP – With sterling starting the week relatively strong against both the euro and the US dollar, despite the BoE keeping the base rate and asset purchase target unchanged, it was expected that we would see further sterling confidence emerge especially if economic releases remained consistent. This proved to be the case as data out of the UK in the form of industrial and manufacturing production rose both on an annual and monthly basis above the level that the market was expecting evoking a mini sterling rally despite the sector output falling slightly. There was more firm support for sterling as the unemployment rate in the UK slipped to a five year low of 6.6% as employment rose by its largest margin since 1971. Strong data along with BoE Governor Carney’s comments late on Thursday night regarding hiking rates sooner rather than later saw sterling edge past last week’s 18-month high against the euro into the 1.25s and approach a five year high against the US dollar close to the 1.70 level once again. This week should prove to be crucial once again with the release of inflation data in the form of PPI and CPI, retail sales figures and the policy meeting minutes. With inflation remaining the current source of forward guidance for the BoE, we expect the data release to have a large influence on the outcome of the MPC meeting in which the BoE is expected to revise the time frame in which they are likely increase the base interest rate.

USD – The US dollar started the week on a fairly quiet note amid the lack of any fundamental data releases and therefore remained vulnerable to selling pressure with volatility remaining low and US yields also edging marginally lower. Towards the back end of the week we saw the release of retail sales figures which rose by less than the market was anticipating although the previous month’s figure was revised up slightly. The increase was led by sales increases at auto dealerships, building material stores and gasoline stations which rose in line with expectation. Jobless claims also unexpectedly rose on the previous month and this pushed the four-week moving average higher. With employment remaining a key component of the Federal Reserve’s forward guidance, it is likely that they will continue winding down their stimulus package in line with the time frame originally set. On the US dollar downside, there was some disappointing inflation data released in the form of PPI which declined both on a monthly and annual basis. With inflation remaining a threat to US economic recovery it is likely that this will be a topic of discussion at the FOMC meeting later this week. This week also sees the release of more inflation data in the form of CPI followed by the eagerly anticipated FOMC rates meeting and the Federal Reserve Chairman Yellen’s speech.  With the base rate almost certainly expected to remain unchanged, market participants will be looking more towards any further hints with regards to a time frame in which the Federal Reserve could take action.

EUR – There was very little euro support last week following the ECB’s decision to cut rates the week before. Industrial output increased across the region, rebounding with a twice as strong monthly rise in May thanks to energy and non-durable goods production. The data followed the release of strong eurozone retail sales figures and a rebound in German industrial orders.  Every economic release had little direct impact on the region’s currency as market participants remained tentative about the effect of the ECB easing measures on the single currency economy, especially considering the fact that this is the first time that the central bank has introduced negative deposit rates. There was further bad news for the euro as the annual inflation rate weakened substantially in May to 0.5% across the region and in Germany. With deflationary pressure remaining the key concern for the ECB, it appears as though the release of weak CPI figures has somewhat helped justify the central bank’s decision to take action as early as this month. With no influential data releases this week, we expect the euro to remain vulnerable and as a result we could see further losses against both the US dollar and sterling following the release of the monetary policy meeting minutes out of both nations.

AUD – Last week started with RBA Governor Stevens highlighting the need for swift sorting of regulations and banking reforms in order to prevent another financial crisis occurring. Data out of the nation showed that demand for home loans in the nation was flat in April along with business confidence as the economy comes to terms with the recent budgetary changes and shift away from the nation’s dependence on the resources sector following a drop off in commodity prices. Consumer confidence also bounced back from a negative result in May as data out of China continues to remain on the positive side and the ECB’s decision to take action last week is likely to see further euro outflows flood into high yielding economies such as Australia which should aid growth and reassure stability. With very little out of Australia this week we expect external factors to have a bearing on the direction that the currency takes. With violence looming in Iraq we expect there to some degree of impact on a number of commodity linked currencies with the OPEC’s second biggest producer of crude oil plunging deeper into trouble following seizure of the country’s major oil gateway. Only time will tell how big an impact the troubles will have on markets but we should see Australian dollar maintain its strength with the currency appearing more and more like a safe haven asset.

End of Week Forecast:

GBP/EUR – 1.2600

GBP/USD – 1.6980

EUR/USD – 1.3500

GBP/AUD – 1.8120

Kamil Amin
FX Analyst
Caxton FX

Euro quickly corrects following ECB rates cut announcement

GBP – This week proved to be relatively quiet from a sterling perspective with the BoE keeping both the base rate and the asset purchase target unchanged. There was however some speculation that the BoE could raise rates sooner than expected as the manufacturing sector continued to post strong data in the form of PMI figures. The manufacturing sector currently accounts for around 11% of the UK’s total economic output and has expanded in almost every month since March 2013 and this is likely to a large contributing factor in the decision making of the monetary policy committee in the meeting later this month. Despite sterling appreciation over the past few months having made products less competitive globally and dampened the number of new export orders out of the UK, we expect output to build up some steam in Q3 especially as demand increases globally on the back of strengthening economic recovery. This week sees the release of more manufacturing data as well as employment figures out of the UK. If there continues to be signs of improvement and data exceeding the forecasted levels we could see sterling continue posting gains especially against the euro which has very little in the form of support this week.

USD – The US dollar had another steady week with both the ECB and BoE rates meetings failing to deliver anything that wasn’t already priced into the market. Data out of the US remained fairly inconsistent as the trade balance deficit widening in April as imports increased and exports fell again. It is expected that as long as the domestic expenditure areas of the economy continue to provide evidence of a Q2 rebound in growth, the Federal Reserve will stick to its programme of tapering its asset purchases. If and when this ends, we will also be able to gain a better idea of when rates could be hiked as the US economy embarks on some form of an exit strategy to prevent a knee jerk reaction to the lack of added stimulus. One positive out of US last week was the non manufacturing index which rose to a nine month high in May. The increase reflected gains in business activity, new orders and employment components showing signs that recovery in the US is gathering some pace. This week is expected to be a bit quieter with the release of PPI and retail sales data towards the back end. With inflation still remaining a threat to the US economy, the market will be keeping a close on PPI figures and we are likely to see some activity if there is a sizeable percentage change in either direction.

EUR – Data out of the eurozone at the start of the week almost guaranteed that the ECB would take action on Thursday. Inflation data out of Germany and the eurozone as a whole were down below the forecasted level with CPI data showing that the consumer price inflation increased by the smallest amount in more than four years. The ECB’s dovish tone in recent weeks has kept a lid on euro gains over the past few weeks. Following the ECB’s decision to cut the main refinancing rate by 10 basis points to 0.15% and introduce negative deposit rates we saw both the US dollar and sterling spike against the euro for a short period of time before returning to levels prior to the decision as we saw growing sentiment limit further downside pressure on the back of comments from ECB President Draghi that the euro exchange rate wasn’t a policy target and that the region’s economic recovery is a lot more important than the current levels of inflation. With signs emerging that global economic recovery is not as upbeat as originally thought there is further pressure on the eurozone to show more consistent signs of improving to prevent the euro from dropping off too much. Amid the lack of economic releases this week out of the eurozone we expect the euro to remain fairly vulnerable and we could see weakness emerge on the back of strong data from its developed economy peers.

AUD – The past month has seen a lot of changes take place in the Australia as the economy undergoes reconsolidation and borrowing costs remain at historically low levels. Despite signs of weakness emerging, the Australian dollar has remained historically high even though commodity prices have continued weakening further and the RBA decided to keep the base low at historically low levels for at least another month. Before the rates meeting, there was some mixed data out of the country with trade deficit narrowing to its smallest level in two and a half years and the house price index posting its biggest decline in over five years. Bearing this in mind it was unsurprising that the RBA left rates unchanged with uncertainty still surrounding the effect of the budgetary changes, the recent decline in investment in the mining sector which is still contributes significantly to Australian GDP growth and signs that inflation is heating up. The exchange rate has helped keep a lid on inflation and as a result the RBA have remained tight lipped on the issue but the market will be looking at consumer confidence figures and non-resource industry data even more closely before evaluating the direction of the Australian economy and the underlying strength of its currency. With some important data out of both China and Australia this week we could see some resistance broken especially if we see signs of China improving further with Chinese data currently having a more lasting impact on its neighbouring commodity linked currencies than data out of the countries themselves.

End of Week Forecast:

GBP/EUR – 1.2360

GBP/USD – 1.6820

EUR/USD – 1.3600 

GBP/AUD – 1.7970

Kamil Amin
FX Analyst
Caxton FX

US dollar rally ends on the back of weaker than forecasted annualized GDP figures

GBP – It has been a fairly active week from a sterling perspective despite the lack of any fundamental economic releases.  The week started with further sterling outflows as the modest GDP figures continued to price into the market. BoE Governor Carney’s comments midweek regarding the risks which remain in the nation’s financial sector further fuelled speculation that the underlying strength of the UK economy may not be as the strength of sterling might suggest. With signs of the UK’s housing market also stalling, it is likely that the BoE will continue maintaining its current monetary stance for longer than firstly anticipated. If and when we do see a hike in rates it is likely to be very steady with the BoE concerned that a sizeable increase could backfire. This week sees the release of manufacturing PMI data out of the UK as well house price and trade balance figures. These indicators will provide a better indication of how economic recovery is progressing and should provide extra food for thought going into the BoE rates meeting on Thursday. The meeting minutes should provide the market with some added volatility as the BoE forecast their medium term outlook for the economy and the timeframe in which we should expect to see some form of policy tightening.

USD – The US dollar posted healthy gains this week despite starting the week fairly flat. Durable goods data, which is the key gauge of manufacturing data in the US, despite slipping to a four month low was above the forecasted level and saw the US dollar strengthen reaching a six week high against sterling. The latter part of the week saw the release of revised GDP data which showed that the US economy shrank for the first time in 3 years, increasing the case for the Federal Reserve to main record low borrowing costs to stimulate growth. Despite the weak data, the US dollar climbed to a four month high against sterling and a three month high against the euro before correcting towards the end of Thursday. The correction was caused by inconsistent data in the GDP report which showed that consumer spending, job growth, imports and business investment all increased but exports and personal consumption indicator, which is the key inflation indicator, declined. With Key economic releases out of the US next week in the form of PMI manufacturing and trade balance, it will be interesting to see if the US dollar will continue posting gains against its G10 peers if the data comes in above the forecasted level. With more firm support expected from the quote currencies this week as data from May is released and central bank policy makers meet, we are not expected to see the same degree of volatility we saw last week.

EUR –The week started with ECB President Draghi speaking on the back of German GFK consumer confidence data which remained unchanged on March’s figure. He highlighted that with the eurozone experiencing a prolonged period of inflation and weak lending, the ECB would act sooner rather than later with all possible measures of policy loosening feasible. The start of the week also saw some strong showings by anti-EU parties in the European parliamentary elections but it is difficult to know the impact that this has had on the region’s currency with the ECB currently dominating all euro activity. Similarly, weaker than forecasted German retail sales and unemployment numbers, both key economic indicators, appeared to have little direct impact on the currency following their release as the euro stabilised as we approached the end of the week.  With easing expected on the back of the ECB policy meeting this week, we shouldn’t see much activity heading into the meeting with any fundamental data or ECB comments unlikely to cause any significant movement across the euro denominated markets.

AUD – The Australian dollar had a strong week following recent downward pressure on the back of budgetary changes and comments from the Reserve Bank of Australia (RBA) regarding weakening fundamentals in the country. Despite business investment falling for a second straight quarter as the resources industry slows down, spending in the manufacturing sector increased last month suggesting that the Australian economy is starting to reduce its dependency on the mining sector which is due to experience a decline in investment in the medium term. There was also more new good news in the form of the housing sector, which has been viewed by many as the main support to the economy currently, with new home sales increasing 2.9% last month. With more fundamental data out of Australia this week we could see further activity leading up to the important RBA rates meeting in which we expect no development. With the near term outlook of the Australian economy still pointing to a big downturn in fortune, any strong economic releases should see consumer confidence increase and provide another reason for the RBA to maintain their current monetary stance.

End of Week Forecast:

GBP/EUR – 1.2600 

GBP/USD – 1.6770 

EUR/USD – 1.3580 

GBP/AUD – 1.8160 

Kamil Amin
FX Analyst
Caxton FX

Strong Inflation and Retail Sales figures are overshadowed by UK GDP increasing in line with expectation and widening government deficit.

GBP – Sterling continued to dominate most of the market movement throughout the week as fundamental economic releases and the BoE Monetary Policy meeting minutes took centre stage. The start of the week was dominated by BoE Governor Carney’s comments regarding the booming UK housing market and how it remained a threat to economic recovery due to its structural problems and the increase in high value loans. This was overshadowed by better than forecasted inflation data (1.8%) which edged closer to the BoE target level (2.0%), highly improved retail sales figures and also increasing signs of hawkish sentiment amongst some BoE Monetary Policy committee members, which fuelled speculation that growth had picked up sizeably on the previous quarter causing sterling to rally against most of its global peers. The rally was however cut short by GDP data from the UK coming in as forecasted, despite the market having priced in an increase and both exports (1.0%) and imports (1.1%) having slipped on the back of sterling appreciation. With no major economic releases this week, we expect sterling to continue on an upward trend against its major peers as long as there is nothing out of the ordinary.

USD – The US dollar started the week trading range bound amid lack of economic releases and following Fed Chairman Yellen’s comments that the US still had a long way to go in order to achieve a sustainable economy. The eagerly anticipated Fed FOMC minutes on Wednesday also failed to deliver any unexpected activity as the central bank confirmed that they would continue tapering their stimulus programme whilst policymakers discussed an exit strategy and further pushed back the likelihood of a hike in rates to the latter parts of next year. The end of the week saw the US dollar strengthen against its major counterparts following promising US housing and manufacturing data both of which were highlighted as threats to the nation’s economic recovery. This week sees the release of more fundamental data out of the US in the form of Durable Goods Orders and CB Consumer Confidence at the start of the week followed by GDP and more Jobless Claims data towards the end of the week. With employment and manufacturing data being two of three key economic indicators in the US currently with regards to forward guidance, we could see some activity if the figures are above the forecasted level as this will continue building pressure on the Federal Reserve with regards to setting a timeframe in which a hike in the base could occur.

EUR – The euro started the weak on a downward curve as weak GDP figures from the eurozone’s core economies continued to price into the market. This further increased speculation that the ECB would take some form of monetary action as early as June whether it be lowering interest rates, introducing negative deposit rates or quantitative easing. With inflation indicators coming in as forecasted and risk of deflation fading slightly, the ECB definitely has time to weigh up different potential options before pulling the trigger. With Draghi speaking at various economic conferences this week, the market will look for further signs of weak economic recovery as the likelihood of monetary loosening sooner rather than later continues to price in. Data out of the eurozone’s strongest economy, Germany, is likely to dominate any market movement once again with employment and consumer confidence figures released midweek.

AUD – The Australian dollar came under pressure at the start of the week as S&P fuelled speculation that the nation’s top notch ratings remained under pressure and the RBA declared that they expected rates to remain at historically low levels for some time. It is also expected that growth in the upcoming quarters is likely to fall behind the trend as exports slow down, investment in the mining sector declines and the government embarks on fiscal consolidation. With the recently released budget signalling spending cuts and a tax hike, there is now added pressure on policymakers as the Australian public takes caution. The Australian dollar did however receive some much needed support towards the end of the week as better than forecasted Chinese PMI data priced into commodity currency markets. This week should continue to be tentative with the Australian dollar remaining range bound against the US dollar and sterling as the market eagerly anticipates next week’s decisive economic releases which will provide a clear indication of the effect of the budgetary changes made by the nation’s government and whether it falls in line with the dovish comments made by the RBA.

End of Week Forecast:

GBP/EUR – 1.2355

GBP/USD – 1.6855

EUR/USD – 1.3670

GBP/AUD – 1.8160

Kamil Amin
FX Analyst
Caxton FX

A week of mixed data leaves Cable stalled in the 1.68’s, the Bank of England’s inflation report underlines the positives of the economic recovery but leaves room for improvement.

A stern warning from Mark Carney in a televised interview this last Sunday has emphasized the focus of the Bank of England on tackling the price increase in UK housing. “When we look at domestic risk, the biggest risk to financial stability and therefore to the durability of the expansion, those risks centre in the housing market and that’s why we are focused on that”. The focus was on the possibility of the Financial Policy Committee taking action at their June meeting to reduce the inflation of housing prices by reducing the Help to Buy programme which offers mortgage guarantees to borrowers with small deposits. This Help to Buy programme launched by the government was criticized by economists because it fuelled demand rather than tackling inadequate supply.

UK – The Bank of England released their quarterly inflation report last Wednesday in which they emphasized that interest rates need to stay low for a significant period of time, as an interest rate hike would be a last resort for dealing with the concern of rising housing prices. Carney taking a dovish tone during this meeting undermined the pound, and has helped keep an upward limit on the GBP/EUR and GBP/USD rates. Out of the UK this week, we will have the CPI y/y on Tuesday, votes on the MPC Asset Purchase Facility and the Official Bank Rate as well as retail sales on Wednesday, and a second estimate GDP q/q on Thursday. Positive data this week out of the UK could help to boost the pound across the board, as the pound has had a pullback in the last two weeks or so.

EUR – The Euro has suffered in the wake of the last ECB meeting, as the market is steadily pricing in potential ECB market intervention action at their June meeting. In the last two weeks, EUR/USD has fallen a percent and a half as the Dollar has had a rebound and the euro has suffered. Data from the Eurozone this week to watch out for will be French and German Flash Manufacturing PMI on Thursday and German Ifo Business Climate on Friday. European parliamentary elections will also take place this next Sunday, in which voters from 28 European Union countries will elect 751 members to the European Parliament. Elections can create volatility with a currency, and European Polls show that anti-EU extremist parties from the left as well as the right are expected to gain support as well as parties from Greece and Spain that are opposed to the current EU leadership.

USD – The USD has been holding its current levels and even improved against many currencies, as the Dollar Index is relatively flat from a week ago. The US economic outlook is improved after a disastrous first quarter GDP where there was barely any growth as a result of a harsh North American winter earlier this year. Analysts expect the FOMC meeting minutes on Wednesday evening to reflect the sentiment that the US recovery is underway, but any dovish sentiment from Janet Yellen could further derail the currency. Other US data this week will be Unemployment Claims and Existing Home sales on Thursday and New Home Sales on Friday.

End of Week Forecast:

GBP/EUR – 1.2175 

GBP/USD – 1.6750 

EUR/USD – 1.3650

GBP/AUD – 1.80

Nicholas Ebisch

Corporate Account Manager

Caxton FX

ECB defers action most likely until the next meeting, Cable is stopped at 1.70 but remains elevated.

UK – The United Kingdom performed well over the last week, as Services PMI came in positively on Tuesday, the Bank of England kept the Asset Purchase Facility and the Official Bank Rate the same on Thursday, and Manufacturing Production m/m came in positively on Friday. The positive economic outlook has supported the pound against most currencies in the last week or so, but depending on the data this week, we could see further gains. The relevant data this week will be Mark Carney holding a press conference on Wednesday, followed by a Bank of England Inflation Report. This will provide the BoE’s projection for economic growth and inflation over the next 2 years. Aside from this data, there will not be any major data releases, so the strength of the pound will largely be determined by market trends and speculation until the press conference on Wednesday.

EUR – The European Central bank decided to keep rates on hold for the moment, which provided a momentary spike of strength for the Euro, until Mario Draghi made a comment at the end of the press conference which strongly hinted at ECB action at its June meeting. His comment was that “the governing council is comfortable with acting next time”. This helped to restore confidence in Draghi’s pledge from June 2012 to do “whatever it takes” to save the Eurozone. However, this undermined the value of the Euro, which dropped around a percent against the Pound and the Dollar. The Euro has started the week out on the back foot, and with little data on the week to change this momentum against the Euro, we could see further losses. The only high-impact event coming out of the Eurozone this week will include German ZEW Economic Sentiment on Tuesday. Aside from this, we expect the rate this week to be driven very much by market sentiment.

USD – In the past week, the dollar index has made a significant gain of around one percent due to some positive data over the last week. There has been a reversal of the downward trend of dollar devaluation since the middle of April, as short positions are beginning to unwind and market sentiment is helping to reverse the losses that the dollar suffered. Data from the US this week could help to support the dollar, as it is forecast to come in more positively. The data will start with Core Retail Sales m/m and Retail Sales m/m on Tuesday, PPI m/m on Wednesday, Core CPI m/m, Unemployment Claims, and the Philly Fed manufacturing Index on Thursday, and finally, Building Permits data and Preliminary University of Michigan Consumer Sentiment data on Friday. With this busy week of US data, we could see the dollar go either way, but the dollar is on the front foot for now.

AUD – The Australian dollar gained against sterling and most other currencies last week, as there was much action from the Australian Central bank. The market has speculated that the RBA will soon cut interest rates, but the central bank kept interest rates at 2.50% at the last meeting, lending strength to the AUD. The Unemployment rate also dropped last Thursday in Australia, and the Monetary Policy report came out suggesting a more hawkish tone than expected, that indicators of the economic outlook are “consistent with the pace of growth”. This was a big week for the Australian dollar and it comes into this week with momentum in its favour.

End of week forecast:

GBP/EUR – 1.2275

GBP/USD – 1.68

EUR/USD – 1.37

GBP/AUD – 1.7980

Nicholas Ebisch

Corporate Account Manager

Caxton FX