Dollar bears weigh down across the board

Claire Hogarth01/Jul/2014Currency Updates

Sterling started the week with a bang yesterday, powering up to fresh new 5 year highs on the dollar, which in turn opened with a massive sell off across the board, falling to 6 week lows on the euro and yen. Eurozone inflation was bang on expectation while the BIS warned against extended loose monetary policy.

GBP

Positive sentiment was abundant yesterday morning due to a number of factors. A speech from deputy chair of the MPC, Charlie Bean, over the weekend suggested QE will be curtailed sooner than expected, while the ONS’ revisions to previous growth estimates showed that the economy contract by 1% less than thought during the recession, which means that the UK economy returned to pre-crisis levels in Q1 this year. The report was part of a series of ONS briefing papers written in preparation for the adoption of the new European System of Accounts in September that changes the way GDP is calculated. It is expected to add a nominal 5% to UK GDP.

New mortgage approvals fell to their lowest level since June last year this month, at 61k; it is hard to say whether this is an immediate reaction to the BoE’s recent controls or just the natural end to another boom cycle. Other data from the UK is relatively sparse this week, and we look forward to next week’s meeting of the MPC. Only Markit manufacturing PMI out today.

EUR

An important and exciting week for the euro began strongly, as the single currency reached the highest levels against the dollar since the ECB announced a cut in interest rates last month.

Inflation across the EU flat lined at the 0.5% mark in June, the same as May. The positive reaction to the data gave an indication of market expectation, with previous positions clearly indicating expectation for a lower figure. Italy, which published its individual inflation data at the same time, saw a drop to a precarious 0.1%, putting the county one bad month away from the dreaded deflation. It also points to a bigger trend of the struggling core, with periphery nations buoying the average.

The strength of the currency, a barrier to the much desire ‘export led’ recovery, will be a key talking point for Draghi at this Thursday’s meeting.

Markets are primed for GDP on Wednesday and ECB interest rate decisions on Thursday, but first we have Markit manufacturing PMI across the region and German and Eurozone unemployment.

USD

Yesterday’s dollar sell off as soon as US markets opened gave an intriguing insight into the market’s short term expectations. It seems as if a series of early short positions created a very bearish mood and led to a classic sentimental sell off. While the streets has Thursday’s NFP at a relatively strong 213, the market is clearly less confident.

Chicago PMI for June was down 2.9 to 62.6, although home sales rebounded to 6.5% in May. Data out today includes red book index, Markit and ISM manufacturing PMI, IBD/TIPP economic optimism and a speech from Treasury Secretary Lew.

Elsewhere

The Bank of International Settlements, essentially the bank for central banks, published its annual report yesterday. In the document the bank voiced its concerns over the ‘euphoric’ financial markets and their detachment from reality. While consumers within the major economies are still mired in low credit from the financial crisis, the super easy monetary policy from central banks has created a perfect storm of inflated equities and over-leverage. It has suggested a tightening of policy sooner rather than later.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.