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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, but especially those trading Pound Sterling (GBP).
In the US, key interest rate decision-making body is the Federal Reserve’s (Fed) 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
In a sparse week for UK macroeconomic data, most FX traders will be expecting final UK Q1 GDP (Fri, 9:30am) figures to give some movement to the Pound. Most economists forecast the final reading to confirm initial estimates, showing weak 1.2% YoY growth in Q1 2018, down from 1.4% in Q4 last year. Continued UK economic weakness has so far delayed any BoE interest rate hikes, but the last week’s surprisingly hawkish appraisal is partly based on expectations of stronger UK economy in the second half of the year.
Last week, the BoE Chief Economist Andy Haldane joined MPC hawks in voting for an interest rate hike (increasing the number of dissenting MPC members to 3 out of 9), citing, in part, his confidence that UK economy is rebounding from a weak start this year. Markets will be looking to see if final growth figures, as well as the BoE’s Financial Stability Report (Weds, 9:30am) support his argument. Additional hawkish comments from Bank Governor Carney (presenting the Report) could help the Pound further.
As usual, Brexit negotiations cast a shadow over the Pound. While PM Theresa May was able to successfully steward the EU Withdrawal Bill through Parliament, much work remains ahead in negotiations with Brussels. With EU leaders gathering for an important 2-day summit (Thurs-Fri), Theresa May will get a chance to present any new Brexit proposals.
News of progress on Brexit could help the GBP, but keep in mind that any promises May makes to EU peers will need to be later agreed with cabinet Brexit hardliners, whom May is meeting in early July for a conference at PM’s Chequers residence.
EUR
In contrast to the Pound, the single currency Euro will have a busy macroeconomic week, with multiple important indicators of European economic health scheduled for release.
Thursday will be particularly busy, with the release of business and consumer confidence figures from Germany (Thurs, 7am) and the Eurozone (Thurs, 10am), both expected to fall in June. In a further sign of Eurozone economic weakness, German consumer price inflation (Thurs, 1pm) is expected to fall in June after a surprise rise in May, to put further strain on the EUR.
This could be echoed by Eurozone inflation (Fri, 10am), where flash YoY figures are forecast to show a fall in the headline number (1.7% from 1.9% in May), while the less volatile and more important core metric is expected slightly stronger at 1.2% (vs. 1.1% in May). In more positive news for Europe, however, German unemployment (Fri, 8:55am) is expected to hold steady at 5.2% in June. Stronger than expected Euro Area inflation and sentiment figures from the Continent could be beneficial for the Euro.
In political news, EU leaders meet for a 2-day summit (Thurs-Fri) to discuss EU’s asylum policy, Brexit and trade wars. While migration is the focus (with Merkel under fire at home and Italy pressing for stricter rules), Eurozone reform, also championed by Italian Euroskeptics, will also be featured with potential for sharp EUR movements as a consequence.
USD
In State-side news, all eyes will be on final Q1 US GDP data (Thurs, 1:30pm). Final figures are expected to confirm a slightly weaker (albeit still very healthy) 2nd reading at 2.2% YoY US growth, down from 2.9% growth in the previous quarter. These slightly disappointing US figures come in spite of largely strong US data this quarter and could send the USD lower, if confirmed.
Some additional pressure on USD could come from Personal Income & Spending (Fri, 1:30pm), with May incomes expected stronger MoM (0.4% vs. 0.3%), while spending is expected slightly weaker (0.4% vs. 0.6% last month). Personal spending figures have inflationary read-across and thus influence USD FX pairs, with a worse than expected reading hurting the dollar.
In geopolitical news, keep an eye of any new salvos in US-China and US-EU trade confrontations. With US President Donald Trump escalating his threats to put significant tariffs on German automotive products and restricting Chinese hi-tech investments in US businesses, any development in this area could have a impact on USD crosses. Markets are looking for clarity and stability before supporting the USD and the EUR, with any sign of a trade détente beneficial to the currencies.
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Tuesday 26 June
Major Intl Economic Data
15:00 Consumer Confidence (US)
Wednesday 27 June
Major UK Economic Data
09:30 BoE Financial Stability Report
Major Intl Economic Data
13:30 Durable Goods Orders (US)
15:00 Pending Homes Sales (US)
Thursday 28 June
Major UK Economic Data
07:00 Nationwide House Prices
Major Intl Economic Data
– EU Summit
7:00 GfK Consumer Confidence (Germany)
10:00 Business Confidence (Eurozone)
13:00 Consumer Price Inflation (Germany)
13:30 Q1 Final GDP (US)
Friday 29 June
Major UK Economic Data
00:00 GFK Consumer Confidence
09:30 Q1 Final GDP
Major Intl Economic Data
– EU Summit
10:00 Consumer Price Inflation (Eurozone)
13:30 Personal Income & Spending (US)
15:00 Consumer Confidence (US)
Technicals
Technicals
Technicals
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Prepared by Michael van Dulken, Head of ResearchComments are closed.