The Forex Week In Review

The Forex Week In Review

The main issues dominating Forex markets this week were the ECB June Rate Decision and the US Employment reports for May. The ECB passed largely as expected with the central bank maintaining policy at current levels whilst highlighting the scope and the bank’s willingness to enact further measures if necessary. Importantly, the ECB revised up its inflation forecast for the year as a consequence of higher Oil prices and their anticipated effects.

The US May employment reports took markets totally by surprise on Friday with the headline Non Farm Payrolls printing just 38k vs the expected 160k. This data lands as a stark disappointment for USD bulls who had been riding the recent positive in momentum driven by Hawkish comments from various Fed members and Hawkish FOMC minutes. Despite a significant shift lower the Unemployment rate declined to 4.7% . USD was sharply lower in response to the data and traders now look ahead to Fed Chair Yellen who speaks next week, for clues to whether or not the Fed’s position will have changed.

Overview

  • USD Building expectations for a possible June rate hike were sharply unwound last week in the wake of a shockingly low Non Farm Payrolls print for May which printed at just 38k vs the expected 160k. This data comes shortly after Fed Chair Yellen noted that a rate hike was probably appropriate in the coming months provided economic data continues to pick up in Q2. With this sharp decline in labour market conditions, confidence in this sentiment has now weakened materially.
  • EUR ECB paused as expected, leaving main refinancing rate unchanged at 0.0% and deposit rate at -0.4%. President Mario Draghi left the door open for extension of the stimulus program if needed and commented that “UK should remain in the European Union, because the European Union would benefit from its permanence”, joining BOE in highlighting downside risks of Brexit. June’s macroeconomic projection foresee real GDP to increase 1.6% this year and 1.7% in the next two years, with this year’s forecast revised slightly higher from March forecast. CPI was also revised higher for this year to 0.2% in 2016 (previous 0.1%), but unchanged at 1.3% in 2017 and 1.6% in 2018 GBP Sterling was pressured over the week on news that the latest Brexit polls show a surge in support for the Vote Leave campaign and a narrowing of the majority with which the Vote Remain campaign hold the lead. On the data front, indicators were mixed with Consumer Credit and Mortgage Approvals weaker than expected in April but Manufacturing PMI ticking up to 50.1 from 49.4 previous to stall the decline in that sector
  • JPY The Japanese Yen rallied over the week boosted by news that the proposed Japanese sales tax increase will be delayed from 2017 until 2019 so as to avoid causing further damage to the weakened Japanese economy. Further support was found on the back of comments made by BOJ member Sato who criticised the bank’s decision to adopt negative rates and urged the BOJ to take a different path in battling deflation.
  • AUD The Australian Dollar stemmed the tide of recent losses this week, deriving support from a slew of positive data. Domestic Building Approvals and Private Sector Net Credit both printed above expectations in April whilst 1Q GDP was much stronger than expected printing 1.1% vs 0.8% QoQ  and 3.1% vs 2.8% YoY . Chinese data also provided a boost with China Manufacturing PMI beating expectations in May.
  • CAD The Canadian Dollar continues to be weighed upon as the prospect of a nearing US rate hike takes its toll. Persistent strength in Oil prices is adding some support however with Oil breaking the $50 this week despite failure by OPEC to agree a production limit.