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Currency Market Analysis

Jul 15, 2019 | Currency Market Analysis

Global Themes

Key UK data hogs the limelight; the week ahead


Aussie cheers China data

A slew of important Chinese data has kick-started the new trading week. China’s GDP growth in the second quarter of the year slowed to a 27-year low to 6.2% y/y, from 6.4% in the previous quarter. Sentiment remains upbeat though as industrial output data jumped, and retail sales surged a massive 9.8% y/y.

The ongoing US-China trade war has bruised the global economy and tainted risk appetite in financial markets, but this morning’s key data has been positively interpreted. New stimulus measures in China appear to be supporting the economy, boosting production and retail spending. Emerging market currencies and the Antipodean currencies have begun the week firmer as a result. GBP/AUD has fallen for a fourth day straight and hovers back near 5-month lows.

Safe-haven currencies such as the Japanese Yen and Swiss Franc have weakened due to the improved risk sentiment. GBP/JPY still lingers near 2½-year lows, bar the January flash crash, but is attempting to pull further away from the ¥135 handle this morning.


Rate cut bets hurting US Dollar

The US Dollar remains on the defensive, under pressure on expectations of a US Federal Reserve (Fed) rate cut at the end of the month. Comments by Fed policymakers this week will be carefully scrutinised and retail sales and industrial production data are also on the radar this Tuesday.

Last week, Fed Chair Jerome Powell, along with other Fed members, reaffirmed the need to cut rates to help support inflation. A 25-basis-point cut is fully priced into the market but there is currently a 20% chance of a 50-basis-point cut, which is weighing on the dollar. The data this week could be key in tilting the probabilities of future rate cuts or a 50-basis-point cut this July, which is likely to drive dollar sentiment. If the data disappoints, investors could continue selling the US currency, which may allow GBP/USD to extend last week’s bounce and challenge the $1.26-$1.27 neighbourhood.

EUR/USD pounced on the weaker dollar last week and is flirting with the $1.13 threshold this morning. Should the dollar continue to be sold, this currency pair could re-test the important resistance level around $1.1350 where key moving averages reside. A breakout towards $1.15 may develop if these hurdles are overcome this week.


GBP/EUR toys with 6-month lows

It’s a relatively quiet week of data from Europe with key events being the German ZEW surveys on Tuesday and Eurozone inflation data on Wednesday. Despite the dovish European Central Bank sentiment of late, the Euro is battling to climb higher against the weaker dollar, which is keeping GBP/EUR anchored near €1.11.

Sterling managed to prevent a 10-week losing streak last week, ending the week just 1 point higher than it opened, suggesting the downside pressure on this pair remains intact. Already this morning the currency pair is slipping back towards fresh 6-month lows near €1.11. The 9-week losing streak was the longest negative run against the Euro since the inception of the common currency and if Sterling sentiment remains sour, an extension towards €1.10 could quickly develop.

All eyes will remain fixed on the economic data from the UK and Europe but also on how EUR/USD trades as this often impacts on the direction of GBP/EUR. If EUR/USD does manage to stretch towards $1.15, then GBP/EUR could slide under €1.10.

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