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May 2017

Weekly Currency Insights from Halo Financial

Published: Monday 15 May 2017

What to look out for this week
  • Sterling strengthens again after Bank of England statement
  • European elections dominate Euro performance 
  • Disappointing data and rising oil prices weaken the US Dollar
  • Chinese Inflation fails to fell commodity currencies
By David Johnson

Pound picks up despite mixed signals

Despite the negativity coming from the Bank of England’s UK growth downgrade and the release of lukewarm manufacturing and industrial sector data, the Pound has picked up, following an initial fall. We are expecting Retail Inflation, Employment and Retail Sales data this week, with a mixed bag of forecasts, so there is more volatility in store for Sterling throughout the week. Keep a close eye on the Pound’s performance against its key currency partners over the coming days. 
Elections dominate European focus

Election activity is the key focus for Europe and the Euro right now, with the spotlight on Germany. The success of Angela Merkel’s party in North Rhine-Westphalia could be positive for the Euro, as the chance that Merkel will retain her chancellorship could give the Euro and the Eurozone a little confidence boost. Otherwise, there is little data expected this week, except the latest Eurozone Gross Domestic Product (GDP) figures and European Central Bank (ECB) Minutes. 
Rising oil prices have taken their toll on the US Dollar
USD-Euro one to watch…
Rising oil prices have taken their toll on the US Dollar, following further oil production restrictions. However, a member of the Federal Reserve hinted that there would be another two interest rate increases in 2017, which served to balance the USD’s fortunes.
There is not a huge amount of data to come out of the US this week, other than Housing and Industrial Production results. The EUR-USD rate will be one to watch over the coming days and weeks.
China and the commodity currencies
The Australian and New Zealand Dollars were largely unaffected by muted Chinese Inflation data, but there will be a number of Australian and New Zealand data releases this week, which may have an impact.
Canadian Dollar could weaken if forecasts correct
Towards the end of this week, we will get the Canadian Retail and Inflation figures, predicted to be poor, and this could have a negative effect on the Canadian Dollar. If you are selling or planning to sell Canadian Dollars, it would be a good time to assess your risk and look to protect your rate by trading before the data is released or making use of a Stop Loss Order or Forward Contract. Speak to your currency consultant for further guidance.

What you may have missed last week
  • Europe in the midst of election fever
  • Sterling falls and strengthens again following Bank of England (BoE) growth downgrade
  • New Zealand Dollar struggles as interest rates held
  • Australian Dollar stronger on Chinese export data
By Denzil Rickerby

There’s a lot going on in Europe right now – and will be for the foreseeable future. France breathed a sigh of relief following the election of Macron and the Euro responded positively. Next stop, Austria, once again under threat from right wing politics; and another concern for the Euro. Then there are Germany’s elections in six months’ time, alongside the ongoing Brexit negotiations… The Euro is holding up well, but not seeing significant upward movement.
Elections have been the focus for April, with the Sterling-Euro exchange rate gapping lower as the French election played out. Emmanuel Macron has held a firm stance on Brexit, calling the UK’s decision to leave the EU “a crime” in his manifesto. He has said he would ensure that Britain will be given no undue advantage. Investors priced in a Macron victory; since the last Monetary Policy Committee meeting, we’ve seen widespread improvements in the Eurozone economy. Unfortunately for European Central Bank (ECB) President Draghi, the biggest problem for the Central Bank isn’t growth, but inflation, which dropped in March 2017 by more than they had anticipated. This is why Draghi has reiterated the central bank’s dovish stance and emphasised that there been no discussion regarding any reduction in their Quantitative Easing (QE) program.

The markets’ focus has not just been on the French election, but on the surprise announcement of a snap general election in the UK on 8th June. UK Prime Minister, Theresa May, described the snap election as being necessary to ‘make a success of Brexit’. As initial rumours circulated in the market that there could be a snap election being announced, this actually pushed the value of the GBP lower, however, after Prime Minister May clarified her reasoning for the announcement – to shore up the Conservatives’ small majority in parliament - Sterling rocketed higher. An election victory will increase May’s own legitimacy and her ability to push back on irrational demands, especially when the UK starts to make concessions. 

Data from the UK has been pushed to the side lines and politics has once again taken centre stage. The surprise election has raised the prospect of a softer Brexit, since she will not be held to ransom by some hardline Brexiteers, propelling the Sterling-Euro rate to a five-month high. Ultimately, the outlook for the Pound rests on what kind of deal the UK secures from the EU; and that remains a source of uncertainty. Germany’s Chancellor, Angela Merkel, has said that the 27 remaining EU Members have agreed that the financial settlement must be the priority. The ‘divorce bill’ the EU will present to the UK is expected to be in the region of €20 billion and €60 billion. However, Boris Johnson has been talking about the bill Britain may present to the EU in return…
Bank of England (BoE) downgraded UK growth from 2.0% to 1.9%

Sterling falls and strengthens again following Bank of England (BoE) growth downgrade

By David Johnson
Meanwhile, in the UK, the Bank of England (BoE) downgraded the UK growth forecast slightly, from 2.0% to 1.9%, after a slowdown in consumer spending and rising inflationary pressures.

Once again, only one Monetary Policy Committee (MPC) member voted to raise interest rates, so rates were held at 0.25%.
While the latest Consumer Spending and Gross Domestic Product (GDP) data disappointed, recent Purchasing Managers’ Index (PMI) results have, in contrast, looked very positive, providing some extra momentum for the Pound and balancing sentiment to some degree.
In advance of last week’s “Super Thursday” announcements, Sterling was on the rise again, reaching rates against its major currency partners not seen for months and even years. The Pound was testing the EUR 1.20 level and the USD 1.30 level. However, immediately following the release of BoE Monetary Policy Committee meeting minutes, Sterling fell against both the Euro and US Dollar from the highs seen early this morning; falling by 0.40 percent and 0.43 percent respectively.

Despite all these key economic figures being released and the jumpiness of the Pound in response, we believe markets will continue to focus on the UK general election and the ongoing Brexit negotiations, which are likely to have a greater impact on Sterling than snapshot economic data and forecasts. Volatility and uncertainty will continue for the Pound in its major currency pairings. We are seeing that in movement across the Euro, US Dollar, and Australian Dollars, in particular.  

New Zealand Dollar struggling as interest rates are held

The New Zealand Dollar fell against its key currency pairings as the NZ central bank kept interest rates on hold. This was largely priced in to markets, but there had been rumours of a rate increase following positive economic news, which provided a greater contrast when the announcement was made.

Australian Dollar strengthens on China’s trade surplus news

Chinese trade surplus figures came out at $38 billion for April 2017, higher than forecast and a noticeable increase from the March result. Markets will be watching China closely, as Chinese export growth is a key indicator of future export growth, and the latest figures show that imports and exports fell short of predicted levels.

This news boosted the Australian Dollar, given Australia’s close export relationship with China. Australian business confidence came out at its strongest since 2010. However, the small change in the AUD-GBP exchange rate on this news soon corrected.
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