Strong Dollar bounce continues for a second week; Euro hangs on, Sterling struggles
01/Jun/2015 • Currency Updates•
The US Dollar hit a short-term low on May 15th. Since then, it has rallied at the same frantic pace we had witnessed since October 2014 and, after last week’s impressive performance, has now recovered 60% of the ground it lost since the dovish FOMC statement on March 18th.
Last week’s rally came in spite of a downward revision to the first-quarter GDP numbers, which showed an outright contraction in the US. The fact that the greenback still managed to rally means that markets are looking past the seasonable effects that have depressed US data releases lately and are looking forward to a reacceleration of growth over the next three quarters, in line with our expectations. In this context, the Euro actually outperformed all non-Dollar G10 currencies (save the Swiss Franc) and managed to end the week only marginally down. By contrast the Pound lost about 1% against the Euro and about 1.3% against the US Dollar.
The antipodean currencies (Australian and New Zealand Dollar) deserve special mention after their terrible performance last week, losing well over 2% against the US Dollar and coming in as the worst performing currencies in the G10. Neither of their respective Central banks can be blamed directly, as there were no meetings or key statements, but both of them were certainly glad to see their currencies fall back to, what they regard as, more sustainable levels.
The last week of the month is usually a barren time for data releases in the UK, as it comes before the Bank of England announcements and the PMI survey release. Last week was no exception. All we had was the first revision of first-quarter GDP numbers (left unchanged at the 1.2% annualized rate) and a modest fall in consumer confidence.
Sterling therefore received no guidance from macroeconomic releases or monetary policy announcements, and it followed its G10 peers in the downward trend against the Dollar, while also retreating more modestly against the Euro. We expect next week’s PMI surveys to be generally positive, consistent with 2-3% growth in the UK and therefore foresee a first hike by the Bank of England in the first quarter of 2016.
The fourth week of the month is also normally a quiet one in European trading. No major economic news were released, so the Euro traded listlessly and moved mostly in response to headlines coming out of the Greece negotiations. The generally positive mood there on Friday meant that the Euro outperformed most other G10 currencies to end down only marginally against the Dollar. However, until a final agreement is reached with Greece (which we expect to happen within the next ten days), the Euro will remain vulnerable to sharp swings in sentiment driven by leaks from the negotiations.
All eyes will shift now to the ECB meeting next week. Two issues will dominate the headlines. First, Mr. Draghi will no doubt be drilled about the state and (lack of) progress in the negotiations for a new agreement with Greece. Second, and equally important, the ECB will share its latest growth and inflation forecasts and its assessment of the QE program so far. Markets expect no meaningful change in either, and we are certain the ECB is eager to oblige them and keep itself out of the spotlight while the positive effects of QE filter through to the Eurozone economy.
Last week was important in the US, both because of the news released, and the market’s reaction to it.
First quarter GDP was revised down from a weather-impacted 0.2% to an even lower -0.7%, marking the third quarterly contraction during this expansion. The fact that all negative prints have been during the winter quarter supports the theory that this has more to do with problems with seasonality rather than fundamental weakness in the economy.
The key to the exact timing of the first hike by the Federal Reserve is still the evolution of the US labour market. Therefore, all eyes now shift to the May payroll report to be released next Friday. Another net job creation number in the 200-250,000 range should keep the Fed on track to raise rates either in July or September of this year.