Currency markets this week have been at the mercy of a resurgent American dollar. The Greenback as it’s often referred to has been on a tear, advancing to nearly 10-month highs on a trade weighted basis. This was driven by encouraging economic events, beginning with Wednesday’s better than expected Q2 GDP results. Data from the US Bureau of Economic Analysis showed that output in the United States grew at 4.0% in the second quarter of 2014. This was significantly more growth than the consensus forecast of 3.0% and a much needed reversal of Q1’s revised -2.1% contraction. The outcome has revived interest rate speculation and put bulls in the driver’s seat.
The US Federal Reserve’s (Fed) regularly scheduled monetary policy announcement was also on Wednesday, and as expected another tranche of tapering from the Fed’s quantitative easing program occurred. Meaning that chairperson Janet Yellen is on pace to wrap up the Fed’s massive asset purchasing program on schedule in autumn of this year. During the press conference Yellen acknowledged that pressure was starting to build in the American economy. However she noted that slack in the labor market, expressed by soft wages growth, was still a concern, and thus she was cool to the idea of interest rate hikes in the near term. This however did little to dissuade Greenback demand.
Finally, rounding out a trifecta of important American economic events, on Friday employment statistics were announced. The headline number showed 209k jobs were added to US economy, slightly worse that the expected 233k. This led the unemployment rate to tick up to 6.2%, slightly worse that the 6.1% that was forecast. However the disappointment has not been interpreted as a game changer as far as the future American interest rates are concerned. As such investors have largely shrugged it off and the USD remains buoyed as the week winds down.
Greenback interest has compounded soft domestic data this week and weighed heavily on both Euro and Sterling. July Eurozone CPI numbers were released this week and posted a disappointing multi-year low of +0.4%. This suggests that June’s European Central Bank (ECB) policy accommodation has perhaps not done enough to stem disinflationary pressures. Correspondingly EURUSD has cratered this week, plunging to its lowest level over 8-months. From here the pair looks to be eyeing historical support from November 2013 in the 1.33 handle; which is a far cry from the 1.4000 area the pair made a run at less than 3 months ago.
The story for Cable is similar to that of EURUSD, weaker than expected local data, in the form of UK Manufacturing PMI, intensified declines related to strength in the USD. As such GBPUSD has capitulated, dropping to 6-week lows following a run to multi-year highs in early July. Notably this pair has now breached important technical support that has defined activity since late 2013, which elevates the possibility of further declines. Historical support dating back to May 2013 near 1.6700 seems like a logical support level to be conscious of.
After a fairly light billing this week, the UK data calendar is especially busy next week right off of the starting line, with some kind of major event almost every day. Monday and Tuesday see Purchasing Manufactures Index (PMI) survey results for Construction and Service sectors respectively. The consensus forecast for the Monday Construction PMI number is 62.0 against last month’s reading of 62.6. Meanwhile Tuesday’s Services PMI result is expected to print 57.9 versus 57.7 the month prior. During 2013 both of these indicators accelerated strongly, moving comfortably above the critical 50.0 level, which suggests expansion in the sector. However in 2014 there has been a stabilisation, indicating that the UK economy might be moving toward a steady state of growth. For Sterling to continue to outperform currencies like the American Dollar data, including PMIs, has to point to continued enhanced growth.
While there is data almost every day, it’s Thursday that will be most hotly anticipated by financial markets. This is due to both the Bank of England (BoE) and ECB being scheduled to make their regular monetary policy announcements. In both cases no change in policy is expected, rather the focus will be on any accompanying statements. On the UK side, given that data over the last couple of months has largely been in line with expectations, BoE governor Carney may opt to not make any statement at all. In fact traditionally it’s common for the BoE to only make statements when a change in policy occurs. With no policy changes expected, markets would likely be unsurprised if there wasn’t a statement either. Rather Carney might choose to wait until the Quarterly UK Inflation report (and economic projections), which will be released later in August, to offer markets his own views. Meaning that BoE policy announcement could turn out being a non-event.
There is some extra uncertainty surrounding the upcoming ECB meeting in light of this week’s Eurozone CPI disappointment. Investors will be keen to see how ECB president Mario Draghi deals with the persistently disappointing economic results. With negative deposit rates already in place, and certain constitutional limitations surrounding the ways that the ECB is permitted to increase liquidity, Draghi is left in an unenviable position. Given however the latest round of policy accommodation took place only 2 months ago, Draghi is likely to play the wait-and-see card next week. Either way it’s hard to envision a scenario that is positive for the common currency.
