Currency (Forex) Weekly Analysis 11.07.2016

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the pound weakened further last week as monetary policy easing by the Bank of England seemed increasingly likely. The week’s economic data were mixed, with attention primarily on the US’s June jobs report. The Non-Farms figure surprised to the upside, but markets remain cautious about the chances of a Fed rate hike in the near term. Highlights this week include Fed speeches, US CPI and Retail Sales releases, the Bank of England’s meeting on Thursday, and Final Eurozone CPI figures. The ongoing fallout of the UK’s decision to leave the EU will remain in focus with Theresa May set to become Prime Minister after David Cameron resigns on Wednesday.
The pound remained relatively under pressure last week as markets continued to react the fallout of the vote for Brexit. UK economic data were mixed. Construction PMI and Services PMI both disappointed. Construction PMI dropped from 51.2 to 46.0, a seven-year low, while Manufacturing PMI fell from 53.5 to 52.3, reversing the gain seen in May.  A press conference on the BOE’s Financial Stability Report as easing by the BOE seemed increasingly likely. The pound received some support Thursday morning from above-forecast data, including a 1.3% gain in Halifax HPI from the previous month and 0.5% declines in both Industrial Production and Manufacturing Production from April to May. On Friday morning, the pound received some additional support both from a lower-than-expected Goods Trade deficit, which widened from an upwardly revised 9.4B to 9.9B as exports fell by less than imports on a month-to-month basis. The stabilising political landscape in the UK offered the pound some support at the end of the week.
Attention will primarily be on the Bank of England this week. The BOE is expected to hold its Inflation Report hearings on Tuesday, release its Financial Policy Committee meeting minutes on Tuesday and quarterly Credit Conditions Survey Wednesday, and will announce its latest interest rate decision on Thursday. BOE Governor Carney then speaks on climate change and the financial markets in Toronto on Friday. Of particular interest will be the BOE’s interest rate decision after earlier comments from Governor Carney indicated that the BOE might cut interest rates and easing this summer might be appropriate. Markets are speculating that the BOE may cut interest rates from 0.50% to 0.25%, which would likely weaken the pound. If the BOE holds off on raising rates, a possible cut later in the year remains a risk to the pound’s strength. BOE comments and releases ahead of Thursday’s meeting may pose a risk to the pound’s strength if they leave the door open for easing at the meeting. Markets will continue to keep an eye on the UK’s political situation, which has stabilised over the past week. The pound rallied on Monday as Andrea Leadsom announced her withdrawal from the race for Conservative Party leadership, and Prime Minister David Cameron congratulated Theresa May and said he would offer his resignation to the Queen on Wednesday.
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Retail Sales in the Eurozone increased 0.4% from the previous month. German Factory Orders were unchanged from April to May, compared to April’s 1.9% decline. The ECB’s Monetary Policy Meeting Accounts discussed the possible implications of a vote by the UK to leave the EU but had relatively limited impact on the euro’s strength. Given the relatively light economic calendar, the euro’s strength was driven at least in party by risk sentiment as investors followed the development of the UK’s post-Referendum situation, while concerns that contagion from the UK’s vote could spread to other EU countries has remained a potential threat to the euro’s strength.
The euro’s movement this week will continue to be influenced by risk sentiment and discussion of any potential spillover from the UK’s Referendum, particularly in terms of impact on the Eurozone’s economy through trade and financial markets, and any signs of contagion to the other EU countries. In times of uncertainty, the euro tends to act as a haven currency; while the political situation in the UK has stabilised, renewed uncertainty could lead to further support for the euro. The Eurogroup meets on Tuesday to discuss the economic and financial situation in the Eurozone as well as the effect of the UK’s EU Referendum on financial markets. Markets will look for any implications for monetary policy in the Eurozone or for the euro’s future strength. Key releases this week include Industrial Production, forecast to contract 0.5% in May after April’s 1.1% gain, slowing on a y/y basis as well. Final CPI figures, out Friday, are expected to confirm inflation rose to 0.1% and core inflation to 0.9% in June, while Friday’s Trade Balance is expected to show that the Eurozone’s trade surplus narrowed from 28.0B to 25.2B.
The main event for the dollar last week was Friday’s June jobs report, which markets were closely watching after May’s disappointing Non-Farm Employment Change print of 38K essentially eliminated the odds of a June Fed rate hike. The dollar strengthened on Friday as June’s Non-Farms figure came in significantly above expectations of around 175K at 287K, while May’s figure was downwardly revised to 11K and the Unemployment Rate rose to 4.9%. Average Hourly Earnings rose more slowly than expected at 0.1%. While the dollar initially strengthened on the Non-Farms jump, those gains were capped as markets speculated the Fed would nevertheless hold off on raising interest rates in July. Other economic releases out earlier in the week saw Factory Orders contract 1.0% from April to May, ISM Non-Manufacturing PMI rise to 56.5 from 52.9, and weekly Unemployment Claims fall to 254K from 270K. June’s Fed Meeting Minutes indicated a cautious Fed ahead of the UK’s Referendum.
This week, Fed comments in light of Friday’s jobs report and the implications for the timing of the next interest rate hike will be among the key drivers of the dollar’s strength. Hawkish comments indicating that a Fed rate hike remains on the table could offer the dollar some support, particularly given that the Fed and markets may not see eye-to-eye on the odds of a rate hike this year. Whether the comments take a more hawkish or dovish tone will likely determine the dollar’s strength this week. Releases to keep an eye on include Friday’s CPI, forecast to hold steady at 0.2% on a m/m basis and pick up slightly to 1.1% on a y/y basis, and Retail Sales, which are forecast to pick up 0.2%, while Core Retail Sales are expected to increase 0.4%.

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