GBP Could Hit 3 Month High Against EUR

Posted on June 4, 2013 by

US Dollar Succumbs to Further Deleveraging
Will the RBA Save the AUD?
NZD – Lifted by Stronger AU and Chinese PMI
CAD – Gold and Oil up 1.5%
Will the ECB Alter the Playing Field?

The British pound traded higher against the U.S. dollar and Euro following better than expected manufacturing PMI numbers. According to the latest report, manufacturing activity increased at a faster pace in the month of May and what made the numbers even more positive for sterling was the upward revision in April. Originally, a contraction was reported but now we learned that the sector grew slightly in the first month of the quarter. The third straight month of improvement should ease the concerns for the Bank of England who meets later this week.  At this point, there is almost zero chance of a move by the BoE, which means that Thursday’s meeting will most likely be a non-event for the GBP/USD. While there may still be a bias for more stimulus, as long as the economy improves, there will be limited urgency.

The euro traded sharply higher today, breaking above 1.30 after U.S. economic data surprised to the downside. Perhaps the tides are shifting with European data improving and U.S. data deteriorating. As we have seen in yesterday’s Eurozone manufacturing PMI numbers, the outlook for Europe is brightening. The manufacturing sector did not contract as much as initially reported in the month of May.

The greenback fell aggressively after U.S. economic data surprised to the downside, giving investors more reason to reduce their positioning. Last Friday’s decline in U.S. stocks and the complete breakdown in Japanese equities have made investors nervous. The breakdown in the greenback drove USD/JPY below 100, the EUR/USD above 1.30 and the AUD/USD above 97 cents. No U.S. economic reports are scheduled for release today but the abundance of data expected tomorrow will keep the U.S. dollar in focus.

Over the next 24 hours, the Australian dollar will be a central focus for FX traders because of the Reserve Bank of Australia’s monetary policy announcement.  The AUD staged a very strong rally against all major currencies today, rising more than 2% against the U.S. dollar and over 1% against the euro.  Better than expected Australian and Chinese data played a large role in the currency’s rally but U.S. dollar weakness drove the AUD/USD above 97 cents.

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GBP Shrugs Off Dovish MPC Comments and Weaker Data

Posted on May 30, 2013 by

FX: Exhausted Markets – Profit taking
EUR Immune to Weaker German Data and OECD Forecasts
JPY Soars on USD/JPY Unwind, MoF Data on Tap
CAD – No Surprises from BoC, Slight Optimism on Economy
NZD – RBNZ Threatens Intervention
AUD – Shrugs Off Weaker Leading Indicators

Over the past month we have seen some extensive moves in the financial markets. The dollar index rose to its highest level in more than 2 years, the S&P 500 hit a record high and U.S. 10 year Treasuries dropped to its lowest level in over a year. When we have moves as strong as the ones that we have seen in recent weeks, exhaustion will eventually set in and that is what we have seen today. While currencies, equities and bonds all reacted in a way that is consistent with profit taking.

While the British pound held steady against the EUR, it traded higher versus the greenback. Sterling completely ignored the steep decline in the CBI reported sales index and the dovish comments from Bank of England policymaker Bean and extended higher on dollar weakness.

Household and business sentiment data will take centre stage across Europe today. In the UK the Lloyds Bank Commercial Business Barometer for May will be watched for guidance on Q2 GDP growth following the 0.3% q/q pickup in Q1. Last month, the market analyst’s outlook for the UK economy improved, which suggested that the recovery in activity seen in Q1 was set to continue.

The euro traded higher against the U.S. dollar today but the rally stalled below 1.30. Considering the steep slide in European equities and the larger than expected increase in German unemployment, the euro should be trading much lower. However dollar weakness has driven all of the major currencies higher and continued profit taking should lend additional support to the euro. Yet in the grand scheme of things, the rise in German unemployment and the OECD’s grim forecast leaves the ECB in a position to ease and while the bar may be high, they may not be shy about publicizing their options.

Euro area industrial and consumer confidence data for May are also released this morning. After recovering between October 2012 and February this year, industrial optimism has softened a little recently as euro area growth prospects disappointed. However, the index is expected to edge up this month, on the back of the recent cut in the ECB’s key refinancing rate. On the other hand, consumer confidence has recovered steadily since last November, broadly in line with the momentum of euro area equity markets.

US Q1 GDP (saar), pending home sales for April and initial jobless claims are also released today. Lloyds TSB global team expect the GDP figures to be revised upwards in line with a modest softening of imports. The recovery in the US housing market is also expected to be reflected in a 2.0% m/m pick-up in pending sales. Initial jobless claims, released for the week ending May 24 are expected to repeat the previous week’s reading of 340k.

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Poor UK Retail Sales Sees British Pound Weaken

Posted on May 22, 2013 by

USD – Cue in Bernanke
GBP – Time for BoE Minutes and Retail Sales
EUR – Consolidating Above 1.28
AUD – Main Takeaway from RBA Minutes
CAD – Retail Sales Growth Expected to Slow
NZD – Shrugs Off Stronger Credit Card Spending
JPY – What Amari’s Conflicting Views Say About Yen Sentiment

Data out today will likely show that UK retail sales fell for a second consecutive month and PSNB was £8.1bn in April. The latter is only anticipated to garner a significant market reaction if the shortfall deviates markedly away from consensus estimates. Meanwhile, the release of May’s MPC minutes are expected to indicate no change in the committees recent decision to keep further QE on hold, with the vote pattern remaining at 3-6-0. However, we do acknowledge that  a risk that one or two members, including the Governor, may have rejoined the majority following the Bank’s more upbeat economic assessment in the inflation report. There is a broad expectation that new Governor Carny will ease policy soon after  his arrival on 1 July. Yesterday’s softer than anticipated April inflation figure provides further support to that view.

Today’s Eurozone current account data won’t receive much attention, but it is notable that this has shown steady improvement in recent months, and the current account is now in surplus by EUR135bn in the 12 months to February. At the same time, portfolio investment is also positive, showing EUR103bn of inflow in the same 12 months. The offsetting flows mainly come form “other” investment, which includes cash, hedging and speculative flow, but in the longer run the combination of current account, FDI and portfolio flow that make up the “basic balance” is better correlated with the performance of the currency. Even though a lot of the improvement in the current account relates to weak Eurozone demand, as long as this is not leading to portfolio outflow it is hard to see it as EUR negative. The EUR consequently looks supported by these flow fundamentals as long as there is no obvious emergence of new reasons to be short.

Fed Chairman Bernanke’s testimony to Congress will be the main event this afternoon. Further clarification on his recent comments indentifying the risks to financial stability from too long a period of accommodative policy will be sought. Three weeks after introducing a more symmetric outlook for future Fed asset purchases, we doubt that the Fed Chairman wants to talk up the prospects of tapering. And FOMC minutes, while slightly dated, will detail the discussions surrounding the latest change to the Fed’s outlook. However, discussion of medium-term risks seem consistent with our view that tapering will occur soon after the economy accelerates, which we expect in H2. US existing home data for April is also due for release.

Eventually, the Fed will presumably withdraw from QE3, and tapering may well start before the end of the year. But the USD has already priced this in by regaining all the ground lost relative to yield spreads that was seen in response to the initial announcement of QE3. We would expect Bernanke to remain broadly dovish in this afternoon’s testimony to the JEC, and that should mean the USD weakens anyway. But if he were to indicate some possibility of tapering over the summer, or if the market were to interpret his comments that way, the knee jerk reaction would certainly be USD positive. But even then, the fact that the USD has already reversed the QE inspired decline suggests the USD upside is quite limited, especially since only Japan is currently undertaking QE. Indeed, the Eurozone is effectively withdrawing QE because the LTRO volumes are being slowly repaid week by week.

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