Currency ( #Forex ) Weekly Analysis 26.07.2016

3679756-orange-stock-market-world-economy-abstract-background.jpg Morning All Users;
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Highlights last week included increased BOE rate cut expectations and sterling weakness on the back of Flash Manufacturing and Services PMI figures. The ECB held interest rates and monthly QE purchases unchanged. This week, attention will be on the Fed’s meeting on Wednesday as well as GDP figures from the UK, the Eurozone, and the US, and Eurozone inflation.
GBP
The Bank of England was in focus last week, both following comments from MPC members that indicated not all members lean as strongly towards easing next month as earlier comments by some of their peers might suggest, and as data at the end of the week increased expectations of a rate cut. MPC Members Weale and Forbes have expressed concerns over the possibility of overshooting the target inflation rate and have therefore been more cautious about easing in August than peers Vlieghe and Haldane. Data out at the beginning of the week, taken before the UK’s referendum, were largely positive. CPI y/y rose to 0.5% from 0.3% and Core CPI y/y rose from 1.2% to 1.4%. Average Earnings were up 2.3% in May and the Unemployment Rate fell to 4.9%, a new low since 2005. Claimant Count Change increased 0.4K, less than expected. Retail Sales declined 0.9% after gaining 0.9% the previous month. Attention was primarily on Friday’s one-off Flash Manufacturing and Services PMI data, the first releases based on data collected solely after the referendum. Manufacturing PMI fell from 52.1 to 49.1, its lowest level since 2013, while Services PMI fell from 52.3 to 47.4, the sharpest drop on record and the lowest level since 2009. The pound tumbled across the board on the releases and as speculation of a possible BOE rate cut increased.
The economic calendar is quieter for the pound this week. The main release of the week is Wednesday’s preliminary Q2 GDP. Economic growth is forecast to pick up from 0.4% in Q1 to 0.5% in Q2, which may offer the pound some support. Last week’s PMI figures indicate a likely slowdown in Q3, and in light of this expectation an under-forecast Q2 figure could pose a greater disappointment to markets. Net Lending to Individuals, out Friday, is expected to decline from 4.3B to 4.2B, which may weigh slightly on the pound but likely won’t have a significant impact on exchange rates unless it surprises in either direction.
EUR
Economic sentiment weakened in July in both Germany and the Eurozone as a whole. The German index dropped from 19.2 to -6.8, while the Eurozone index fell from 20.2 to -14.7. Both indices fell to their lowest levels since 2012. As was largely expected, the European Central Bank stood pat on monetary policy for now. As with the BOE, the ECB continues to seek a better understanding of the potential impact of the UK’s Brexit vote before announcing further stimulus, and the euro briefly strengthened before returning to pre-meeting levels. The euro received some support from largely as expected or better-than-expected Manufacturing and Services PMI figures. The French Services index returned above the key 50 mark, while the French Manufacturing Index remained below it. German and Eurozone Manufacturing and Eurozone Services indices fell compared to the previous month, although largely by less than expected, while the German Services index rose from 53.7 to 54.6.
The calendar picks up this week with numerous releases. Preliminary CPI figures are expected from Spain, Germany, and the Eurozone as a whole, as are Preliminary GDP figures. Of particular note will be the Eurozone figures, out Friday. Slower economic growth in the Eurozone and unchanged inflation figures may weigh on the euro as the week draws to a close. Monday’s German Business Climate fell less than expected, from 108.7 to 108.3, briefly offering the euro support. On Friday evening, the European Banking Association releases its Bank Stress Test Results, which markets will keep an eye on, particularly following the UK’s vote to leave the EU and any corresponding further potential risks to financial market stability.
USD
Housing data out at the start of the week indicated gains in both Building Permits and Housing Starts, with the latter rising to an annualised 1.19M, the highest level since September 2015. Recent positive data have increased expectations that the Fed may raise interest rates this year. The Philadelphia Fed Manufacturing Index fell from 4.7 to -2.9 but seems to have been outweighed as weekly Unemployment Claims, which were forecast to increase, remained relatively unchanged at 253K, compared to 254K previously, and as Existing Home Sales jumped from a downwardly revised 5.51M to 5.57M. There were no major economic releases towards the end of the week.
Highlights this week include Wednesday’s Fed meeting and Friday’s Advance Q2 GDP. The Fed is likely to keep interest rates unchanged, which may weaken the dollar. A decision to raise interest rates would likely surprise markets and strengthen the dollar. Of particular importance will be the language used by the Fed and any guidance as to the likelihood of a rate hike later in the year. Note that there is no press conference following this meeting. Q2 GDP growth is expected to accelerate from 1.1% in Q1 to 2.6% and may offer the dollar some support towards the end of the week. Other releases to keep an eye on include Consumer Confidence and Revised Consumer Sentiment, New and Pending Home Sales, and Durable Goods Orders.

 

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