I sincerely hoped I could start this update without a reference to Donald Trump. Evidentially I have blatantly failed. When someone (and their administration) creates a story in an obvious attempt to scare up support for their own domestic policies, this is an accurate example of what we can expect to drive currency markets now. Pure politicking and the generation of more “fake news”, in a post truth environment, with little to no factual backing, is enough to confuse anyone. Whatever happened to the pot and the kettle?
GBP/USD posted moderate losses last week, closing just above the 1.24 line. It was a positive week in the US, as data showed the economy continues to strengthen. In the UK, CPI rose to 1.8%, shy of the forecast of 1.9% and the BoE appears in no rush to raise rates, even with inflation moving higher. Monetary divergence favours the USD.
U.S. retail sales increased more than expected in January, rising 0.4% and consumer prices registered the biggest leap in nearly four years, gaining 1%. The positive data boosted the odds for another rate hike next month. Janet Yellen presented lawmakers with a positive assessment of the US economy, and strongly hinted that another rate hike is coming in H1 of 2017. Other economists believe that strengthening domestic demand, together with firming inflation and a tightening labour market, could allow the Fed to raise interest rates at least twice this year.
The concern at home in the UK, visible to anyone in the Bank of England’s own reports, lies beneath the facade of the otherwise relatively impressive data Philip Hammond uses to justify his “steady-as-she-goes approach”. I must admit to sourcing this from a Guardian (please don’t judge me) article but wage rises appear to be stuck in first gear going downhill. The Bank of England expects pay packets to rise in response to increasing inflation over the next year. However, the 340 businesses polled from around the country apparently reported plans to scale down increases from 2.7% to 2.2%.
GBP/USD movement can be seen on the graph below:
GBP/EUR There was “risk off” sentiment on French news last week, with a few people noting the resilience of the Euro and it is puzzling us a bit. It may be premature but renewed Grexit worries combined with the possibility of hard left v hard right in France should be Euro negative just on the increased uncertainty. However, there was a genuine effort in the rhetoric encouraging France to come out of the currency union. How Euro trades now will depend on what it will become. Will it be a northern Euro currency (i.e. more German heavy and therefore undervalued at current levels) or the same broad church Euro (albeit perhaps without France) and therefore overvalued?
Depending on how you think the Euro will fare, you may wish to consider calling one of our team to fix forward rates of exchange to mitigate downside exposure.
EUR/USD was looking for a new direction as politics continued moving markets. German GDP came out below expectations, dragging overall GDP figures lower. However, the European Commission marginally upgraded growth forecasts, in a cautiously optimistic move. In the US, data came out better than expected and Yellen sounded upbeat. None the less, the US dollar struggled to gain and even reversed the initial gains before balancing things out at the end of the week.
EUR/USD began last week on the back foot, reaching down to the 1.0570 level. It then fell to support at 1.0520 before bouncing back and trading at the 1.06 level. This week downside moves to 1.05 are likely over the midterm. Downside support around 1.0526 – a clear break below this level could suggest further downside to 1.0455. EUR Buyers might look to stagger orders at 1.0526 to 1.0455.
German Chancellor Angela Merkel suggested the euro is too low for Germany - "We have, at the moment, in the euro zone of course a problem with the value of the euro," Merkel said in an unusual foray into foreign exchange rate policy. "The ECB has a monetary policy that is not geared to Germany, rather it is tailored (to countries) from Portugal to Slovenia or Slovakia. If we still had the Deutsch-Mark it would surely have a different value than the euro does at the moment. But this is an independent monetary policy over which I have no influence as German chancellor."
Euro movement against the Dollar can be seen on the graph below:
Major Events this week:
1. German PPI and Bundesbank monthly report published today.
2. UK GDP data: Wednesday, economists expecting growth to slow after GDP remains unchanged for at 0.6% for Q4
3. US Crude Oil Inventories: Wednesday, overall demand for gasoline in the last four weeks declined 5.3% year-on-year at 8.43 million barrels per day.
4. US FOMC Meeting Minutes: Wednesday, 19:00.
5. German GDP (final): Thursday morning expect further pull for EUR strength.
6. US Unemployment Claims: Thursday, 13:30. The number of Americans who filed claims for unemployment benefits rose by 5,000 to 239,000 in the week from Feb. 5 to Feb. 11. However, the number remained at exceedingly low levels indicating a nearly eight-year-old economic recovery.
From all of us at Aston Currency Management we hope you have a great week and please do not hesitate to contact a member of the team to discuss any of your foreign currency exchange and international payment requirements.
Written by Damien Lipman