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Currency Market Analysis

Jul 12, 2019 | Currency Market Analysis

Global Themes

Sterling clings on to critical levels

GBP

BOE policymaker hits the wires

The Bank of England’s (BOE) monetary policy committee member Gertjan Vlieghe is speaking at 9:00am today. Mr Vlieghe usually leans towards the hawkish side, but his recent dovish comments on poor UK economic data presents a risk to Sterling today.

Back in June, after Mr Vlieghe dovish remarks, GBP/USD fell two cents over four days as market expectations of a BOE rate hike began to fade. Sterling suffered another blow recently when BOE Governor Mark Carney signalled a rate cut might be needed to support the slowing economy. Markets are now pricing in a 30% chance of a UK rate cut before the end of this year (source: CME Group). Despite the UK economy growing 0.3% in May, after contracting 0.4% in April, fears of a slowdown are still clouding the economic outlook and no-deal Brexit fears continue to hang over the central bank. If Mr Vlieghe reaffirms the economic risks associated with ongoing Brexit angst, the pound could slide once more today.

GBP/EUR is battling to end the week above €1.1150 to prevent a 10-week losing streak, while GBP/USD attempts to thwart a weekly close below the critical $1.25 threshold, which could prompt a trend reversal for next week.

EUR

Euro falters before industrial production

The Euro slipped yesterday after the release of the European Central Bank (ECB) minutes of its June policy meeting. The dovish minutes suggested further stimulus measures may be needed to help the struggling Eurozone economy. GBP/EUR crept away from 6-month lows as EUR/USD fell further south of $1.13. A key trading point today is Eurozone industrial production, due at 10:00am.

The market is pricing in an 80% probability of an interest rate cut by the ECB this September and a 30% chance of one as soon as July 25. Today’s economic data could shift these probabilities and drive Euro sentiment. Eurozone industrial production for the month of May is forecast at 0.2% m/m, up from April’s figure of -0.5%. The year-on-year figure is forecast at -1.6%, a steeper decline than the twelve months through April, where industrial production declined 0.4%. The data today will be a good measure of where Eurozone GDP growth will arrive for the second quarter of the year. This flash figure will be released at the end of the month.

EUR/USD has started the morning off on the offensive, mainly due to the weaker US Dollar, edging towards $1.13 again. The currency pair looks set to end the week positively after suffering its biggest weekly decline in nearly a year last week. If the Euro continues to climb against the dollar, GBP/EUR may struggle to gain much ground today.

USD

US Dollar largely ignores CPI rise

Yesterday, data revealed US underlying consumer prices in June rose by the most since December 2017. The US Dollar trimmed losses but continues to nurse its wounds from the dovish comments by Federal Reserve (Fed) Chairman Jerome Powell mid-week.

After Mr Powell cemented expectations of an interest rate cut in the US, the dollar index, which tracks the US currency against a basket of other currencies, slumped over 0.5%. This allowed EUR/USD to scale 2-week peaks yesterday and GBP/USD to stretch towards $1.26. However, upbeat inflation data helped a modest dollar recovery, albeit short-lived. The Fed tracks the core personal consumption expenditures (PCE) price index for monetary policy, which is why yesterday’s data did little to shift market expectation of the US interest rate outlook. Last month, the Fed downgraded its inflation projection for 2019 from 1.8% to 1.5% and money markets are now fully pricing in at least one interest rate cut before year-end, most likely at its meeting at end of this month.

The recent weakness in the dollar may soon wear off though as investors digest the fact that other central banks, including the BOE and European Central Bank could soon join the Fed in easing monetary policy.


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