GBP/USD – Is There Enough Momentum to Hit 1.73?

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Daily FX Market Roundup 06.19.14

GBP/USD – Is There Enough Momentum to Hit 1.73?

Positive US Data Failed to Help the Dollar

3 Reasons for EUR/USD Bounce

USD/CAD in Play, Should Hold 1.08

AUD: Gold Hits 2-Month Highs

NZD: Solid Q1 GDP Growth

JPY: BoJ Officials Express Confidence in Economy

GBP/USD – Is There Enough Momentum to Hit 1.73?

The British pound rose to its strongest level against the U.S. dollar since October 2008. Despite the lack of hawkishness in the Bank of England minutes, more U.K. officials joined the chorus of policymakers hinting of an earlier increase in rates. This morning Ian McCafferty from the BoE said the central bank should not hold back rate hikes for too long and begin raising rates before the output gap is fully closed. This followed earlier comments from Martin Weale who said that while he doesn’t see the case for raising rates right now, he’d be surprised if the BoE’s view did not change in the near future. The day before he said the “BoE may need to raise rates faster than markets anticipate” because “gradual rate increases may mean starting earlier.” We now count no less than 3 U.K. policymakers (Carney, Weale and McCafferty) as proponents of an earlier rate hike and with more likely to follow, its no surprise to see sterling extend its gains. In fact mixed U.K. data did not stop the rally – U.K. retail sales dropped 0.5% in the month of May which was right in line with expectations but on an annualized basis, sales growth slowed more than anticipated and the past month’s numbers were also revised lower. Despite World Cup fever, consumer spending declined for the first time since January but the pullback was expected after a long stretch of strong spending. Manufacturing activity on the other hand is growing nicely with the total orders component of the CBI industrial trends survey rising strongly in the month of June. The question now is whether sterling has enough momentum to hit 1.73. The main resistance zone for the GBP/USD is between 1.7040-50. While the currency pair broke through this zone today, it ended the North American trading session right near it, which means that it has not experienced a clean break. From the perspective of monetary policy divergence, sterling should have enough momentum to climb to its next resistance level, which is near 1.7350, the 50% Fibonacci retracement of the 2007 to 2009 decline. However in order for that to happen, we need a catalyst. There is no major U.K. economic reports scheduled for release next week but Carney will be speaking again on Thursday and the BoE will be publishing their Financial Stability report, which could provide more guidance on how the U.K. government could reduce stimulus through fiscal and monetary policy. If the central bank successfully convinces the market that they are moving closer to raising rates, sterling could find its way towards 1.73 – but in all likelihood it will be a slow drift higher.

Positive US Data Failed to Help the Dollar

Better than expected U.S. data and a rebound in U.S. yields erased some but not all of the U.S. dollar’s losses. The currency’s underperformance continues to reflect the market’s disappointment in the Fed. No one expected the central bank to set a specific timeframe for tightening but the adjustments to their unemployment and inflation forecasts were smaller than investors had hoped. Yellen’s comment that there is no formula for what considerable time means sealed the near term fate for the dollar. With the central bank poised to maintain a steady monetary policy course for the near term, we do not expect any big moves. The drop in jobless claims this morning failed to have much impact on the greenback even though continuing claims fell to its lowest level since October 2007. The 4-week moving average also dropped within a whisker of its 7-year low. Manufacturing activity improved according to the latest Philly Fed and Empire State surveys. Leading indicators fell short of expectations but increased from the previous month. Today’s reports are consistent with a steady recovery in the U.S. economy but with the Fed refusing to provide new guidance in the near term, we don’t expect any significant demand for dollars.

3 Reasons for EUR/USD Bounce

The euro extended its recovery versus the U.S. dollar for 3 main reasons – first the U.S. dollar remained weak after the FOMC rate decision. Second, the surprise decision by Norway’s central bank to lower its interest rate forecast for the next 4 years fueled rampant speculation that the Norges Bank is gearing up for a rate cut. This announcement sent EUR/NOK up 2.3% to a 2-month high as the sell-off created renewed demand for euros. Third, the market finally realizes that the ECB won’t be making another move anytime soon. Although ECB member Constancio reminded us today that the central bank could deploy more measures if needed to counter prolonged low inflation and the response would include broad based purchases, before they opt to do so, they will want see how their previous measures affected the economy. This means they will wait at least 1 to 2 months before taking additional action. Meanwhile the Swiss Franc traded slightly higher versus the euro and U.S. dollar after the Swiss National Bank left monetary policy unchanged. This decision was widely expected since only a small subset of investors anticipated any action from the central. As usual, the SNB reminded us that with international factors putting downside risk on growth, they will defend the 1.20 EUR/CHF peg aggressively. The central bank held its 2014 GDP forecast steady and revised up its inflation forecast by 0.1%. This minor change does not alter our outlook for steady SNB policy. German producer prices are scheduled for release tomorrow along with Eurozone current account figures.

USD/CAD in Play, Should Hold 1.08

Even though the New Zealand dollar ended the North American trading session slightly lower against the greenback, the commodity currencies in general continue to hold up extremely well. NZD/USD hovers near 2.5 year highs while EUR/NZD hit a fresh 1 year low before recovering on the back of euro strength. Last night’s New Zealand GDP report was slightly weaker than expected with the economy growing 1.0% in the first quarter compared to a forecast of 1.1%. If you take into account the upward revision to the Q4 report however, the data was basically in line and perhaps a tad stronger because annualized GDP growth hit 3.8% in Q1, the highest level since the third quarter of 2007. Overall, the economy continues to perform well and the data will encourage and not discourage the Reserve Bank from continuing to tighten. As the most hawkish G20 central bank, the RBNZ’s clear desire to raise rates again this year will keep NZD in demand. Meanwhile the Canadian dollar edged higher ahead of tomorrow’s retail sales and consumer prices reports. Given the sharp rise in wholesale sales, we are looking for retail sales to rebound in the month of April but the steep slide in the price component of IVEY PMI suggests that consumer price growth could slow. This means that in all likelihood, USD/CAD will continue to hold above 1.08.

JPY: BoJ Officials Express Confidence in Economy

Strong gains in the Nikkei overnight failed to lend support to USD/JPY. According to last night’s economic reports, foreign investors continued to buy Japanese stocks and even dipped their toes into Japanese bonds. Japanese investors on the other hand were net sellers of foreign stocks and buyers of foreign bonds. The strong performance of the Nikkei has been keeping investment flows domestic and we expect this to remain true for the time being. There was nothing new in Bank of Japan Governor Kuroda’s speech last night. He believes that BoJ easing is having intended effects and right now they are only halfway to their 2% price target. He’s watching the impact of their bond purchases on the market and if problems occur, the BoJ stands ready to take action. With that said, there is still no urgency within the BoJ to ease monetary policy further. According to BoJ board member Morimoto, the economy will not be derailed by the consumption tax and while he expressed some concerns about exports and the impact of tensions in Iraq on oil prices, he expects growth to continue to exceed potential and the 2% inflation target to be reached in 2015. The Cabinet releases its monthly economic report this evening but no major changes to their assessment are expected.

Kathy Lien
Managing Director

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