Euro bounces back amid range-bound holiday trading
27/Jul/2015 • Currency Updates•
Calm continued to return to currency markets last week, as the Greek crisis fades from the headlines and central bankers, for the most part, refrain from surprising markets with their communications. The Euro shrugged from some modestly disappointing economic numbers, while Sterling gave up its early gains after a lower-than-expected retail sales report. In the end, we saw one of those rare weeks where Sterling managed to underperform both the Euro and the Dollar, dropping nearly 2% against the common currency and about 0.5% against the greenback.
Beyond G10 currencies, the most notable financial development is the continued rout in commodity prices. By some estimations, these hit 13-year low last week on the back of signs that Chinese demand for raw materials has peaked.
Although FX markets choose to react strongly to the disappointing retail sales, we think the message from the Bank of England’s July meeting minutes was far more meaningful, given the volatility of the former.
It is clear that the two members that were close to dissent in June have now added to their ranks. The vote was still 9-0, but that had much to do with the worry of “several members” over the Greek crisis. Not that this is past us, we fully expect three dissenters to vote for immediate hike at the August meeting. The hawkish minutes further support our position that interest rate hikes will start as early as February of next year, thereby providing support for Sterling against most major currencies except the US Dollar.
Greek worries continue to fade from European markets. The Greek Parliament passed another set of measures set by the creditors as preconditions, before negotiations for a third bailout could begin.
News from the economic front was modestly disappointing. The all-important PMI business confidence indicators dropped 0.5 in their composite version, down from 54.2 to 53.7. This number is still consistent with moderate growth. However, it is a worrisome sign that an economy, as battered and with as much slack in underutilized resources as the Eurozone’s, cannot manage to post growth in excess of 2%, the level consistent with the PMI indices. The Euro bounced back against the US Dollar, and, more strongly, against Sterling, but the common currency continues to be bound by the 1.08-1.12 EUR/USD range that has held since the finalisation of the Greek agreement.
Last week gave us mostly second-tier reports about the US economy. However, such news as there was, was encouraging.
New home sales hit a new record high for the current expansion, and weekly jobless claims a new multi-decade low at just 255,000. This massive drop bodes well for the July jobs report out in early August, which is key to our expectation of a first Fed interest hike in September.
This week we get the, somewhat dated, second-quarter GDP number and, more importantly, the Fed statement for the July meeting. We expect the latter to provide some hints about a September interest hike, which will in turn buoy the Dollar in currency markets.