Outlook for Euro and GBP

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The U.S. dollar may be trading higher against all of the major currencies this morning but the lack of U.S. data gives us the opportunity to discuss the outlook for the euro and British pound, 2 currencies with Tier 1 data scheduled for release this week. The main driver of dollar strength today is renewed expectations for Fed tapering. Last week, the S&P 500 found a top at 1709 and futures are pointing to a lower open. The sell-off in global equities reflects ongoing concerns that tapering will lead to slower recovery in the U.S. economy. In contrast to Germany and the U.K., where there have been upside surprises in recent data, U.S. economic reports have been tepid. Therefore whether the dollar is poised for further losses in August or geared for a stronger recovery largely hinges on Tuesday’s U.S. retail sales report. Economists expect consumer spending growth to slow but with the International Council of Shopping Centers and Johnson Redbook both reporting stronger sales, there is a reasonable chance of an upside surprise that could extend the gains for the greenback.

However, if this week’s Eurozone and U.K. economic reports beat expectations as well, the gains in the dollar will be limited. Given the recent trend of European data, we believe that despite the significance of the releases from both sides of Atlantic this week, the EUR/USD should trade between 1.3100 and 1.3450 and the GBP/USD between 1.53 and 1.57. In other words we expect recent ranges to remain intact as investors weigh the growth outlook in Europe with the prospect of Fed tapering. For the Eurozone, the German ZEW survey on Tuesday and second quarter GDP numbers on Wednesday are key. There has been a general trend of improvements in the German manufacturing sector that should lift investor confidence but the sharp decline in retail sales in Q2 may have dampened growth in the quarter. If German GDP fails to live up to market expectations, the EUR/USD could slide to the bottom of the range indicated.

In the U.K., Wednesday’s employment report and Thursday’s retail sales release are important but the real market mover should be the Bank of England minutes. The central bank left monetary policy unchanged but the main question is how many MPC members voted in favor of more asset purchases, if any at all AND also how many members voted for the new unemployment rate threshold. If we learn that some members voted for additional asset purchases and the decision for an unemployment rate threshold was unanimous, the GBP/USD could experience additional losses. However if no one favored more QE and some members opposed the threshold, which was the BoE’s attempt to stress their plans to keep monetary policy very easy for a very long time, the GBP/USD could break above 1.56.

Kathy Lien
Managing Director

One thought on “Outlook for Euro and GBP”

  1. Can’t understand bearish on GBP given data flow…upside surprise on CPI and downside on unemployment rate would make MPC guidance and hence BoE minutes irrelevant/less relevant…so why is EURGBP stuck at 0.8600? Some big player (with more money than sense e.g. PIMCO) is clearly supporting EURGBP!!

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