Weekly Currency Analysis March, 20 2016

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The pound weakened last week as Brexit concerns returned to the forefront of market attention, while the dollar recovered some of the previous week’s post-Fed losses on the back of relatively hawkish Fed comments. Several European and UK markets were away for the Easter holiday, while US markets were open. This week’s highlights include comments from Fed Chair Yellen and BOE Governor Carney, the US’s March jobs report, Eurozone inflation figures, and UK Current Account and Manufacturing PMI figures.
GBP – Sterling weakened against both the dollar and the euro last week as Brexit fears came back into focus following the resignation of a prominent Conservative government member and the attacks in Brussels. Markets speculated that the terrorist attacks might increase support for a Leave vote, adding to the uncertainty around the referendum. The week’s main releases were inflation and Retail Sales figures. CPI held at 0.3% compared to a year earlier, disappointing expectations of an increase to 0.4%. Inflation, although having recently crept up, remains well below the BOE’s target rate of 2%. GBP/EUR fell to a low of 1.2582 on Thursday. UK markets were off Friday and Monday for the Easter holiday.
This week’s highlights include a speech from BOE Governor Carney, the UK’s Current Account, and Manufacturing PMI. A wider Current Account deficit may weigh on the pound, while a forecast uptick in Manufacturing could reverse some of any earlier losses. Markets will keep an eye on BOE Governor Carney’s press conference at the Financial Stability Board Plenary Meeting for any comments on financial stability that might have implications for monetary policy, particularly regarding the potential impact of the UK’s upcoming EU referendum. Any renewal of Brexit concerns could weigh on the pound again. Other releases to look out for this week include Final Q4 GDP, forecast to remain unchanged at 0.5% and Net Lending to Individuals, forecast to dip slightly from 5.3B to 5.1B.


EUR – French, German, and Eurozone Manufacturing and Services PMI figures were mixed. While the French Services index returned above the key 50 mark indicating industry expansion, the French Manufacturing Index unexpectedly fell to 49.6. German Manufacturing unexpectedly dipped, while Services rose more than forecast. Manufacturing in the Eurozone as a whole rose as expected, while Services rose more than forecast. Economic Sentiment rose more than expected in the Eurozone but less than forecast in Germany. The index measuring German Business Climate rose more than forecast.
There are few releases of major impact expected this week. Markets will keep an eye on initial CPI figures from Germany, Spain, and the Eurozone, German Retail Sales, German Unemployment Change, and the Eurozone’s Unemployment Rate. Continued low inflation figures despite an increase in the stimulus provided by the ECB may weigh on the euro and raise questions as to the effectiveness of current policies, while an uptick in inflation could indicate that current stimulus measures may be sufficient to return inflation to the ECB’s target levels. Other releases may prompt little renewed support for the euro unless they surprise to the upside.


USD – Fed Member Bullard added to recent hawkish comments, indicating that he finds the US to be largely on track to raise interest rates again, with some case for raising rates as soon as April or June. US data last week were mixed. Core Durable Goods Orders and Durable Goods Orders both fell in February after rising more than forecast in January, while New Home Sales rose as expected and Unemployment Claims rose slightly less than forecast, from 259K to 265K. Final GDP q/q was revised up to 1.4% from 1.0%. The dollar weakened on Monday of this week on the back of lower-than-expected Core PCE Price Index and Personal Spending figures.


This week’s highlights include a speech from Fed Chair Yellen and Friday’s jobs report. Markets will watch for signs as to whether Fed Chair Yellen shares the relatively hawkish tone expressed by recent Fed speakers or takes a more dovish tone, which could have implications for expectations regarding the timing of the next US rate hike. Friday’s jobs report, including a forecast pick-up in Average Hourly Earnings following a dip in January and a likely unchanged Unemployment Rate of 4.9%, will add another piece to the puzzle as markets look for clues as to the timing of the next rate hike. Hawkish comments and strong figures this week could offer the dollar some support. Markets will also keep an eye on Consumer Confidence, Unemployment Claims, and Manufacturing PMI figures. 

Regards All.


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