The Forex Week In Review
The main focus of Forex markets this week was the July Bank of England Rates meeting, the first since the UK’s Brexit result last month. Expectations ahead of the meeting were finely split with a survey of leading economists suggesting the bank were likely to remain on hold whilst the rate swap market priced in more than a 70% chance of a cut.
The BOE in fact opted to keep rates on hold, though gave a clear signal of their intention to ease in August. Citing weakened economic activity, sharp downturns in household and business confidence and delayed investment and hiring decisions, the BOE felt it prudent to allow for further data to come in before conducting “detailed analysis” of all options at their August meeting. Voting changed from 9 – 0 to 8 – 1 with well-known dove Gertjan Vlieghe voting for a cut. Market reacted aggressively to the news as the rate swap market was pricing more than an 70% chance of a cut. However initial gains against the US Dollar were quickly reversed as focus now shifts to speculation regarding the scale and means of easing to come in August.
Whilst markets were somewhat surprised by the bank’s decision to remain on hold at this point, the move is consistent with the bank’s earlier guidance that it would conduct an initial assessment in July before conducting a fuller assessment in August. The subsequent bounce in GBP may prove to be short lived as traders begin to position ahead of the August MPC meeting.
USD The Fed’s Lockhart took to the wires commenting that he feels two rate hikes are still possible this year, extending Hawkish sentiments in the wake of the bumper June employment reports. On the data front we saw a mixed deck with a big jump in Retail Sales over June,which printed 0.6% vs 0.1% expected, followed by a small beat in Core CPI over the same period and a small miss on headline CPI. Finally, University of Michigan confidence printed well beneath expectations at 89.5 vs 93. 5.
GBP Sterling soared over the week as profit taking emerged amidst thin liquidity with moves then deriving further support from the July BOE meeting which saw the bank opting to keep rates on hold. The bank did however give a firm signal of their intent to easy policy in August at which point they will conduct a “detailed analysis” of all available policy options. Economic activity was cited as having weakened in the wake of Brexit and expected to weaken further though inflation was expected to rise as a result of the weakened GBP.
EUR A quiet data week for the Euro which moved mainly in response to the BOE decision. Expectations are growing ahead of the ECB meeting next week with market expecting the ECB to at least signal further easing with deflationary risk having increased in the wake of Brexit. Possible options to be considered are a further reduction of currently negative interest rates alongside an expansion of the bank’s QE program.
JPY The election of Japanese PM Abe to the Upper House has boosted market expectations for further easing. Shortly after his victory the returning PM announced that he has ordered further easing with full details of the stimulus package to be completed by the end of July. Market attention now shifts to the BOJ’s July 29th meeting with speculation rife as to the scale and method of easing. However, according to a key adviser to the PM Japan should not resort to “helicopter money,” which would see the central bank directly underwriting public debt because that could stoke runaway inflation
AUD Australia’s unemployment rate edged 0.1% higher to 5.8% in June, reflecting the surge in labour participation force (64.9% vs May: 64.8%). Job market remained solid with the total number of people gaining employment rising by 7900 last month, according to the Australian Bureau of Statistics. Chinese data this week added support to the Antipodean currency with Chinese GDP and Industrial Production both beating expectations, boosting risk sentiment.
CAD Bank of Canada decided to keep the policy rate unchanged at 0.5% as widely expected but cut its growth forecast for 2016. BoC stayed optimistic despite it cut the growth forecast. The Canadian 2016 GDP forecast was trimmed to 1.3% from 1.7%, saying that it expected a bounce back in the third quarter and beyond. The Canadian Dollar derived further support from the rally in risk assets across the week as higher Oil prices buoyed the currency which rose to a nine – day high against the US Dollar.