Weekly Currency report

From Peter-John Theuninck, Currency Analyst at Baydonhillfx

To say the Euro range traded last week may be difficult to believe with the high degree of intra-day volatility we experienced but that was ultimately how last week’s trends unfolded. The Euro started the week on the back foot after Moody’s downgrade Italy and from a Euro-zone perspective the downside risks to the single currency remained strong and kept the Euro under pressure. Market participants were concerned that Finland and the Netherlands would continue to oppose the Spanish bank bailout and German lawmakers had yet to announce their decision on ratifying the agreement. These concerns were eventually laid to rest with Finland announcing its support and Germany approving the bailout as well and while their decisions come with some hefty obligations for the Spanish government the market was satisfied with the result.

The Bank of England minutes delivered some surprises as the monetary policy committee was split 7-2 on voting to increase the value of the bank’s asset purchase program as members Dale and Broadbent voted for no increase in quantitative easing at the July meeting. Another point of interest is that the UK central bank has also left the door open for another possible rate cut; there was no evidence on when this might happen as this type of policy action would be dictated by the effectiveness of the stimulus program to support the UK economy.

Other downside factors for the Pound was weaker retail sales figures that highlighted an underlying fragility in the UK economy and coupled with a dovish central bank and lower confidence has seen the Pound limited on upside potential to some degree.

US Federal Reserve Bank Chairman Ben Bernanke caused a sharp appreciation of the Dollar after he did not signal the central bank was moving closer to another round of monetary stimulus during his testimony before Congress, instead he repeated their pledge to act if the need arose but struck a cautionary tone and expressed concerns over the knock-on effects from Europe, however. Profit-taking and a market realignment on the basis of Bernanke’s concerns over US economic stability gave traders cause to pull the Dollar lower, additionally weaker jobs market data was another factor that put pressure on the Dollar as weekly jobless claims increased.

This Week

This week investors will have to contend with increased uncertainty in Europe after it has merged that regional governments in Spain may need central government support to meet their debt obligations. The Spanish region of Valencia has announced it will be seeking support from the Spanish government on Monday which has been the catalyst for increased risk aversion in the market.

The key market event for the Euro will be on Tuesday with the release of the German PMI manufacturing and services indices. Analysts’ have forecast an increase in German economic activity which could provide the single currency with some much needed support but is unlikely to change overall trends for the Euro as forecasts are for only a marginal improvement.

The ‘risk-off’ market theme currently dominating the market should remain as a strong influencer to the value of the Euro and as the debt crisis continues to escalate across a number of regions and expectations of further international bailout’s being required increase, investors are remain fearful.

The second economic data event to keep an eye on will come at the end of the week as German consumer inflation figures are being published. German HICP is forecast to come out at -1.9% y/y in July, the inflation figure was 2.0% in June. The context that will be added to the inflation number is that of monetary policy action, the European Central Bank cut interest rates by 25 basis point at their July meeting and this data will be analysed to see if there may be any cause for further rate cuts although another cut in August is unlikely.

The Pound is again caught between the Euro and the Dollar, trading higher versus the single currency while depreciating against the resurgent US currency. There is certainly an element of knock-on effect from the European crisis that is impacting Sterling as Britain’s economic activity remains subdued. The primary focus will be on the preliminary release of second quarter GDP figures from the United Kingdom on Wednesday, the market’s consensus forecast is for growth to remain at -0.2% q/q which would raise concerns of a second technical recession in Britain. The Bank of England has already indicated that they expecting further downside risks to growth as shown in the minutes of their last policy meeting, increased quantitative easing and talk of possible rate cuts were announced which indicates the level of preparedness by the UK central bank.

The impact of this on the Pound can only be negative but the degree of downside movement may be limited by traders having already priced in the weaker figures and the focus staying on the Euro-zone.  

Safe haven demand and risk aversion can be closely associated to the Dollar and this will remain the case throughout the week as the announcement from the Valencia region that it would need a bailout made abundantly clear. As the European debt crisis continues to unfold there is still some concerns over the economic stability for the US economy as Ben Bernanke’s testimony before Congress last week proved. Bernanke highlighted the jobs and housing sectors are areas of ongoing concerns and the release of US PMI manufacturing data on Tuesday will be the first indicator to show if there is a wider market impact.

The main market event will be on Friday with the release of second quarter US GDP figures, economist have forecast for a 1.4% growth rate which is lower than the final Q1 release and could be one of the few events this week that might trigger a Dollar sell off. The University of Michigan sentiment indices will also need to be considered as economic and consumer sentiment figures are expected to be released.

Economic Data