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Understanding the macroeconomic background is important to FX traders because relative strength of national currencies (and thus FX rates) depends on key economic indicators, such as unemployment, inflation, wage growth, retail sales and, crucially, the key interest rates set by the Bank of England (BoE) and other key central banks (e.g. Federal Reserve, European Central Bank, Bank of Japan).
The BoE’s Monetary Policy Committee (MPC) will make its next key interest rate decision on May 10. Until the middle of last week, consensus implied a 96% probability that the Bank would vote in favour of an increase in the key interest rate, however these expectations were drastically tamed by comments made late on Thursday, April 19, by Bank Governor Mark Carney, who has indicated that a rate rise in May was not a foregone conclusion and that the Bank needed more time to process a run of conflicting economic indicators.
A later-than-expected interest rate hike by the Bank of England would also be in-line with Europe, where dovish sentiment dominates, and where the European Central Bank (ECB) has taken the go-slow attitude in terms of further normalising policy from its crisis extremes (e.g. QE, negative rates).
Possible rationale for BoE’s leaving rates unchanged in May include wage growth that wasn’t as strong as expected, followed by a bigger than expected slowing of Consumer Price Index (core 2.3% vs. 2.5% prior) and perhaps even House Prices. FX traders reacted to this news by selling the Pound Sterling, sending it into a sharp fall by the end of the week versus both the US Dollar and the single European currency.
Recent progress in terms of Brexit negotiations had been a supportive element for the Pound, FX traders liking at least some of the political goodwill on both sides, even if hurdles remain ahead (e.g. status of Irish border), so any additional disruption to these negotiations could send the GBP/EUR further south.
In the United States, the Federal Reserve (Fed) continues to lead the way on policy normalisation, hiking the key rate once this year (in January meeting), with consensus factoring in 90% probability of two further hikes by June. The debate remains whether it will manage four total hikes by the end of the year. These expectations have kept the USD strong against a basket of other currencies (the Dollar index). At the same time, significant political considerations may have a negative effect on the dollar’s fortunes. Increased deficit spending (mainly on defence and social entitlements), funded by debt issuance, has added uncertainty to Dollar’s prospects.
FX traders are also getting increasing uncomfortable with the White House’s obvious preference for low interest rates (he is a property man, after all!). While previous US Administrations have steered clear of commenting on central bank policy, respecting the Fed’s independence, the Trump Administration is getting more vocal about the Fed’s intention to keep raising the key rate gradually throughout the year.
Looming over these deliberations is the spectre of the potential US-China trade war and the introduction of tariffs on imported steel, aluminium, and other commodities. News of the tariffs sent the USD down sharply in mid-late March, any worsening of this trans-Pacific confrontation could have additional negative effect on the USD (helping GBP and EUR), so FX traders will be keeping a keen eye on the news coming from Washington and Beijing. Both US and China are attempting to defuse the row, especially with US Treasury Secretary Steve Mnuchin headed Beijing for trade negotiations.
Rounding out the week will be the release of all-important GDP figures from France, UK and US (Friday, April 27).
Any negative deviations from these consensus expectations could send FX markets into a sharp fall (with the reverse holding for better-than-expected results).
Key data this week (Sign up here to receive our daily live macro-calendar)
UK Economic Announcements
09:30 Government Borrowing
11:00 CBI Trends
Intl Economic Announcements
9:00 IFO Surveys (Germany)
14:00 House Prices (US)
15:00 New Home Sales, Richmond Fed consumer confidence (US)
21:30 API Oil Inventories (US)
Intl Economic Announcements
15:30 Oil Inventories (US)
UK Economic Announcements
09:30 BBA home Loans
11:00 CBI Sales
Intl Economic Announcements
07:00 GfK Consumer confidence (Germany)
12:45 ECB Rate Decision
13:30 Durable goods Orders (US)
16:00 Kansas City Fed (US)
UK Economic Announcements
09:30 GDP, Services
Intl Economic Announcements
06:30 GDP (France)
08:55 Unemployment Data (Germany)
10:00 EU confidence surveys
13:30 GDP (US)
15:00 Consumer Confidence (US)
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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
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