Market lacking impetus
Morning mid-market rates – The majors
June 26th: Highlights
- Established ranges intact
- Data supports Euro
- U.S. GDP to call further rate hike into question
U.K. rate hike likely in Autumn
As the FX market enters its summer hiatus, speculation is growing over the timing of a rate hike in the U.K. There is an uneasy feeling that the “natural anchors” on inflation being relied upon by BoE Governor Mark Carney may not be enough to bring inflation more into line with the Government’s target.
Hiking rates in a slowing economy risks choking off any growth potential but monetary policy remains in an experimental state as additional support in place since the financial crisis is prepared to be withdrawn.
Of course, a lot will depend on the success or otherwise of Brexit negotiations which are set to continue through the summer. Sterling should get a lift once a free trade agreement is in place. David Davis, the U.K. Brexit Minister was quoted in the weekend press as saying that he is confident that such a deal is within reach.
Sterling remains in a tight range buoyed by plentiful liquidity. It is supported at 1.2580 and 0.8850, currently trading at 1.2740 and 0.8780.
Further headway is likely to be difficult without fresh positive news.
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Single Currency likely to benefit from positive data
This week sees the release of consumer and industrial confidence data which provides a forward-looking idea of economic activity and intentions.
Growth in both sectors is expected to be healthy. Although the consumer has been slow to respond to improving economic conditions.
Inflation in Germany is due for release and while individual countries data is not supposed to influence the ECB, a further fall from 1.5% to 1.4% month on month following last month’s fall from 2%, will lessen the pressure on the ECB to hike rates.
Eurozone-wide inflation is also released and following Germany’s lead, that is likely to show a drop from 1.4% to 1.3%. This will confirm Mario Draghi’s view that given the inflation outlook, a rate rise is “some way in the future”.
The euro is still finding it tough going to break and hold above 1.1200 against the dollar but there is good buying interest between 1.1160 and 1.1180.
Fed appears in confused state
There appears to be little consensus among her colleagues over, not only the hikes that have already taken place, but also the future path for interest rates. Despite the support for the dollar provided by a widening interest rate differential there is some doubt that data will support a further hike this year.
The dollar index has fallen by 5.5% this year to a current level of 97.27. However, this has been almost entirely due to the unwinding of the “Trump trade” where exuberance over the new President’s economic policies has been replaced by concerns over the “Russiagate” issue.
Final Q1 GDP data will be released on Thursday. An unchanged read of 1.2% YoY is expected. This is hardly stellar but since it is simply a confirmation of the previous release the effect on the dollar will be minimal.
This week’s events of note
- U.S.: Durable Goods Orders – A notoriously fickle number given the sheer size of individual components. Nonetheless this is a useful barometer of longer term economic activity
- U.K.: Inflation Hearing – Mark Carney faces Parliament to explain why inflation is 50% higher than the Government’s target.
- U.S. : House Price data – A rise of close to 6% month on month expected from a piece of data which is closely correlated with future inflation
- Eurozone: Consumer Confidence – This has lagged behind the “feelgood factor” that is enveloping the region. A marginally negative outlook remains.
- Eurozone: Services Sentiment – Improving all the time as Brexit encourages growth in Eurozone activity
- EurozoneIndustrial ConfidenceImproving but still very patchy. A north/south divide is forming
- U.S. Q1 GDP FinalAn unchanged 1.2% Year on Year expected. Hardly stellar for an economy firmly in “rate hike mode”
- U.K.: Q1 GDP Final – 2% growth year on year is a factor of 2016’s surprising economic resilience. Q4’s slowdown has continued into Q1 with MoM growth at just 0.2%
- Eurozone: Inflation – Growth in consumer prices likely slowed a little with the fall in the oil price. A MoM rise of 1.5% expected
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”