This report is not a personal recommendation and does not take into account your personal circumstances or appetite for risk.
The strongest factors influencing the direction and momentum of Foreign Exchange (FX) rates are changes in the key interest rates, themselves highly sensitive to macroeconomic data such as inflation and economic growth, as well as geopolitical concerns. Higher interest rates tend to render the currency more attractive (and vice versa) which in turn can result in it strengthening versus other currencies.
In the UK, interest rate policy is determined by the Bank of England’s (BoE) Monetary Policy Committee (MPC), which meets several times a year and whose decisions are closely watched by all FX traders, especially those trading Pound Sterling (GBP).
In the US, key interest rate decision-making body is the Fed’s Federal Open Market Committee (FOMC), influencing the US Dollar (USD), while for the single currency Euro (EUR) in the Eurozone, it is the European Central Bank (ECB).
The following events this week could have a major impact on FX markets.
GBP
Geopolitical Events
A combination of macroeconomic data and Brexit developments will be key to GBP moves this week. The House of Commons will be voting on the EU Withdrawal Bill on Tuesday in a marathon session to debate a host of amendments submitted by the House of Lords.
Approval of amendments submitted by the upper chamber seen favouring a “softer” Brexit would likely improve the outlook for Sterling, but the latest MP vote tally, though narrow, appears to support a more hard-line version of the Withdrawal Bill. At the same time, a failure to pass any version of the bill (rogue Tories siding with Labour?) could potentially torpedo Theresa May’s government altogether, with potentially negative consequences for the GBP.
The PM’s ability to maintain discipline within the ranks will be seen as a key metric for the UK’s political stability (and GBP FX cross rates) in the medium term. With the publication of the government’s final Brexit white paper postponed until after the next EU summit on 28 June, the PM has some breathing room to put her house in order, though FX market patience and willingness to prop up the Pound (currently off May lows) may be wearing thin.
Macroeconomic Data
Away from politics, GBP may find some support this week from the latest readings of Consumer Price Inflation data (Weds, 9:30am). While April saw both the headline and core metrics hit their lowest values in 13 months, the headline is expected to have picked up in May to 2.5%, but the core is seen unchanged at 2.1%, just above the Bank’s target, reducing the urgency of an interest rate hike.
GBP could be further boosted by May UK Retail Sales (Thurs, 9:30am), given their inflationary read-across. Forecast growth of +1.8% YoY would represent an acceleration from +1.4% in April and be fastest since August 2017, after a disappointing Q1 due by poor weather. Better than expected consumer price inflation and retail sales may give UK policymakers more reasons to finally hike key interest rates this year to the benefit of the Pound.
EUR
With political discord in Italy and Spain resolved for the time being (although further Brexit developments could always sway the Euro), the ECB will likely be the Euro’s main driver this week.
In a week rife with key interest rate decisions (Fed, ECB, Bank of Japan), all eyes will be on the ECB monetary policy update on Thursday (12:45pm). It lags behind other major Central Banks in terms of policy normalisation, and no rate hike is expected, however markets will be closely following President Draghi’s press conference (1:30pm), as it could shed light on plans to end the Bank’s quantitative easing (QE) bond-buying stimulus programme, which has already been tapered, but is still running.
USD
Macroeconomic Data
The Fed’s FOMC monetary policy update (Weds, 7pm), followed by Chairman Powell’s press conference (7:30pm), will dominate the weekly landscape for USD cross rates. Analysts expect the Fed to once again stay ahead of the curve on policy normalisation (compared to the BoE and the ECB) and increase the federal funds target rate by another modest 25 basis points (to a new 1.75-2% range). USD bulls will be hoping that this helps reverse some of the recent weakness, although the rate hike has been widely expected, with the Fed in the middle of a hiking cycle that began late 2016.
As always, the press conference and the language in the statement could have as big of an impact as the rate decision itself, with economists eager as ever for clarity on: 1) how many more hikes to expect this year, and 2) the Fed’s tolerance for allowing inflation to under- and/or over-shoot its 2% target.
Adding further impetus to the Dollar before the Fed meeting could be US May Consumer Price Inflation (Tue, 1:30pm), with the headline expected to accelerate to 2.8% YoY (from 2.5%), its fastest since late 2011-early 2012. The more important core measure, however, stripping out volatile components such as food and energy, is expected to have risen to 2.2% after a 2-month pause, to the fastest since February 2017, vindicating a Fed hike.
While focus this week will be on interest rates and prices, the other half of economic equation (growth) is expected to find some support from US Retail Sales May data (Thurs, 1:30pm), which are projected to rise to 0.4% from 0.2% MoM (although slower on an annual basis). USD could find some extra support if retail sales turn out to be better than expected.
Geopolitical Events
Geopolitics could also provide some momentum for USD this week, with long-awaited meeting between Kim Jong Un and Donald Trump scheduled to finally take place in Singapore on Tuesday.
Investors will be looking to see if the meeting will be just a photo opportunity for two leaders, or if any substantial commitments will be made by either side to de-nuclearise Korean peninsula and diffuse US-Korean tensions.
Further news of trade tensions with China and other major American trading partners (EU, Canada, etc), on the back of a tumultuous G7 summit this weekend, could also nudge the Greenback FX rate lower.
(Sign up here to receive our daily live macro-calendar)
Tuesday 12 June
Major UK Economic Data
09:30 Average Weekly Earnings, Unemployment Rate
Major Intl Economic Data
10:00 ZEW Surveys (Germany, Eurozone)
13:30 Inflation, Average Weekly Earnings (US)
Wednesday 13 June
Major UK Economic Data
09:30 Consumer Price Inflation
Major Intl Economic Data
13:30 Producer Price Inflation (US)
19:00 Fed Rate Decision and Press Conference (US)
Thursday 14 June
Major UK Economic Data
00:01 RICS House Price Balance
09:30 Retail Sales
Major Intl Economic Data
03:00 Retail Sales, Industrial Production (China)
07:00 Consumer Price Inflation (Germany)
12:45 ECB Rate Decision (Eurozone)
13:30 Retail Sales (US)
Friday 15 June
Major Intl Economic Data
10:00 Consumer Price Inflation, Trade Balance (Eurozone)
14:15 Empire Manufacturing, Industrial/Manufacturing Production (US)
15:00 Consumer Confidence (US)
Technicals
Technicals
Technicals
This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research
Comments are closed.