The FX market awoke from its slumber last week as the UK GDP figure gave Sterling a much needed shot in the arm. This was welcome news for the UK and the chancellor especially after Fitch downgraded the UK economy from AAA to AA+ the week before. On the release of the downgrade there was not much market reaction but the UK GDP figure sparked a 1% rise in both GBP/USD and GBP/EUR. These moves were further boosted by the slightly worse than expected GDP figure out of the US on Friday. The GDP story is not over however as the figures are likely to be revised in a few weeks’ time and surprise, surprise that revision is likely to be downwards rather then up. It always amazes me how much faith the market puts in initial figures only for them to be changed a few later, expect a pullback on the revised figures.The start of the week saw the trend continue as USD came under more pressure from GBP and EUR. Cable pushed through the 1.55 mark on Monday morning as poor data out of the US this week has kept the rate moving upwards. This all puts the pressure on the FED's interest rate decision and monetary policy statement today, out at 19:00. We do not expect any change to the interest rate, as there is no room but for the rate to move upwards and there is no chance of the rate rising in the near future. We could see a movement in the asset purchasing scheme if the FED feels they need to pump more money in then they already have. It is likely that this will happen at some point however the FED is in danger of creating a huge stock market bubble by handing out extra money to be invested in stocks, at some stage this bubble will burst. How can share prices be rising to record highs when real economic growth is negligible to flat? Once the bubble bursts expect the USD to weaken dramatically.
In the near term now we have pushed through the 1.55 level, we could be looking at levels near 1.57 in the near future. Look to work take profit orders at this level or start to think about block buying some of your currency to take advantage last weeks move. EUR/USD has been another benefactor of the poor US data and hit 1.3220 this morning before returning into the high 1.31's. Looking ahead to tomorrow and Friday we have two important events taking place, firstly the ECB interest rate decision and monthly press conference tomorrow lunchtime. Secondly the non-farm payroll figure out of the US at 13.30 Friday. There will be a lot of volatility around these figures especially the non-farm payroll figure which was so disappointing last month. If that comes in well below expectation again, USD will weaken further and we would see EUR/USD pushing up to 1.33.
On other fronts the AUD has weakened around 5% against some currencies like GBP and SGD over the last month which is a major move. This has been caused partly by poor economic figures out of China and domestic pressures in Australia where prices continue to rise. The Australian government will welcome this move as it should help to alleviate some of the pressure they are under.
Let me know your thoughts on where you think the market is heading or if you would like to discuss any particular currency pair, please do not hesitate to get in touch.
Enjoy the rest of the week.
Written by David McNeill