Hedgies banking on Sterling rebound
The Q4 GDP estimate was unchanged from the last reading, and the current account deficit printed below consensus forecasts at £16.8bn for the quarter, meaning the Pound was unchanged in the run-up to the bank holiday. With Sterling unable to make headway, wider Dollar gains on position adjustment pushed the Pound to test the 1.4000 area.
There has been a sharp increase in the number of long, speculative positions to the highest level since July 2014 as hedge funds favour the Pound following the Brexit transition deal. The shift in positioning will make it more difficult to secure further buying support unless UK data is significantly and consistently positive.
Sterling rebounded on Easter Monday whilst UK markets remained closed. The Pound remained broadly resilient even when global risk appetite deteriorated. The Euro retreated to near 1.1430 while Sterling found further support above 1.4000 against the Dollar as UK markets re-opened ahead of the PMI data.
For the end of March, the Dollar continued a firm tone as quarter-end position adjustment gave support to the currency. US initial jobless claims were reduced to the lowest level since January 1973 while the latest PCE prices showed an annual increase in core prices of 1.6% and were in line with consensus forecasts.
Yesterday, the US March Markit PMI manufacturing index improved to 55.6 which was the strongest reading since March 2015. Further, Dollar strengths involved orders growth remaining firm and output prices rising at the quickest pace for four years. Order backlogs also continued to increase to the strongest reading since April 2011 as the prices index rose to 78.1 from 74.2. Survey evidence points to the imposition of tariffs on steel imports already having an impact in raising prices and intensifying capacity constraints.
Finally, the ISM manufacturing index disappointed, declining to 59.3 for March from 60.8 previously but not without a positive note as new orders and production remained above the 60.0 level.
The Dollar regained support as the Euro hit resistance leading up to the 1.2350 area, but the US currency index limited gains with selling interest on approach to 90.0. Cable is currently trading at 1.4050 after making headway last week.
Nonfarm payrolls on Friday will be the main event for investors and traders this week.
The EURUSD pair is choppy and fell below the 1.2300 handle over the long weekend.
Most European centres remained closed for Easter Monday and hence the EURUSD pair consolidated within narrow ranges. Investors have been cautious not to breach the upper barrier and thus avoid attracting the wrath of European Central Bank (ECB) officials.
EU CPI and unemployment data are released mid-week. Better readings will get the market talking about ECB changing its monetary policy stance earlier than expected.
Data to Watch:
05:30 AUD RBA Rate Statement
05:30 AUD RBA Interest Rate Decision
07:00 EUR Retail Sales (MoM) (Feb)
08:55 EUR Markit Manufacturing PMI (Mar)
09:00 EUR Markit Manufacturing PMI (Mar)
09:30 GBP Markit Manufacturing PMI (Mar)
14:30 USD FOMC Member Kashkari Speech
21:30 USD FOMC Member Brainard Speech