Weekly #Forex Analysis 18 July 2016

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Sterling rallied last week as the UK’s political landscape stabilised with the implementation of a new Prime Minister and as the Bank of England surprised markets by keeping interest rates unchanged at 0.50%. The US dollar benefited at the end of the week from above-forecast economic data, including gains in Retail Sales. This week’s calendar includes UK CPI, employment, Retail Sales, and flash Manufacturing and Services PMI figures, as well as US housing data, and the European Central Bank’s first meeting since the UK’s referendum.
marketsoutlook
GBP 
The pound rallied on Monday as Andrea Leadsom withdrew from the race for the Conservative Party leadership and as David Cameron announced that he would resign on Wednesday, with Theresa May to be instated as Prime Minister by Wednesday evening. Political uncertainty following the resignation of former PM Cameron had added to the pressure on the pound following the referendum, and an easing of that uncertainty bolstered the pound. Markets had speculated that the Bank of England would cut interest rates from 0.50% to a new record low of 0.25%, only to be surprised as the BOE held interest rates. The accompanying documents signalled that the BOE would likely cut interest rates in August. Nevertheless, the announcement disappointed markets, and Sterling jumped around the decision to hold interest rates, spiking above 1.3440 against the dollar and 1.2090 against the euro.  The BOE signalled that it would likely cut interest rates at its August meeting. The pound came under renewed pressure on Friday following the release of dovish comments from MPC Member Haldane, who indicated his preference for aggressive easing measures in August. MPC Member Vlieghe also called for easing in August in writing for the Financial Times over the weekend.
This is a busy calendar week for the pound. Inflation is expected to tick up after unexpectedly holding steady in May, which could offer the pound some support, while gains are also expected in Average Earnings. While Claimant Count Change is forecast to increase, the Unemployment Rate is expected to remain unchanged at 5.0%. Retail Sales are forecast to fall 0.4% after May’s 0.9% jump. Public Sector Net Borrowing is expected to increase from 9.1B to 9.3B. On Friday, Markit releases one-off flash releases of July’s Manufacturing and Services PMI figures in light of demand for data indicating the initial impact of a Brexit vote. Largely positive data could offer the pound some additional relief this week. Conversely, disappointing releases could weaken the pound.
Markets will also keep a close eye on BOE comments for any forward guidance following last week’s decision to hold interest rates. In particular, markets will be looking for hints at the extent of any stimulus measures to be announced at the August meeting. The pound briefly strengthened on Monday morning after MPC Member Weale indicated that he is waiting for further economic data before deciding whether to vote for a rate cut, a departure from some of his more strongly dovish colleagues.
EUR 
Overall, the week was a relatively quiet one for the Eurozone’s economic calendar. Industrial Production fell 1.2%, more than expected, but had limited impact on the euro against either the dollar or the pound. As was expected, final estimates confirmed that annual headline inflation rose to 0.1% in the Eurozone in June, while Core CPI rose to 0.9%. The Eurozone’s Trade Balance surplus was narrower than expected at 24.6B. A more stable political situation in the UK helped to improve risk sentiment, which limited demand for the euro, a currency that acts as a safe haven in times of uncertainty.
This week’s calendar kicks off on Tuesday with Economic Sentiment figures from both Germany and the Eurozone, which are expected to show that sentiment has worsened this month. The Current Account surplus is forecast to narrow. The highlight of the week will likely be Thursday’s European Central Bank meeting, which markets will watch for updated guidance following the UK’s vote to leave the EU. Look for updated projections and guidance on possible stimulus as the ECB and markets seek to evaluate the potential impact of the UK’s vote to leave the EU on the Eurozone’s economy. Flash Manufacturing and Services PMI figures for France, Germany, and the Eurozone as a whole round out the week’s releases on Friday.
USD
Initial data out last week underwhelmed, including a drop in JOLTS Job Openings and lower-than-expected gains in Import Prices, but the week ended with a slew of largely better-than-expected releases. The Producer Price Index, an indicator of consumer inflation, rose to 0.5% from 0.4%, while Core PPI was up 0.4%; both had been forecast to ease off when compared to the previous month. Unemployment Claims held at 254K, the lowest level since mid-April. Retail Sales rose 0.6% and Core Retail Sales were up 0.7% The Capacity Utilization Rate rose to 75.4% from 74.9%, while Industrial Production was up 0.3%, having fallen an upwardly revised 0.3% the previous month. Monthly CPI and Core CPI held at 0.2%, while annual inflation held at 1.0% and Core yearly inflation rose to 2.3%. The week’s Fed speakers included George, Mester, and Bullard.
This week’s releases include Building Permits, Housing Starts, and Existing Home Sales, as well as the Philadelphia Fed Manufacturing Index and weekly Unemployment Claims. While dollar movement this week will be partially due to the week’s economic data, it will also be influenced by Fed rate hike expectations and risk sentiment, as the dollar tends to attract investors as a safe haven amidst times of uncertainty. As there is a Fed meeting next week, no comments are expected from Fed speakers after Monday.
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