Sterling fails to grab the bulls by the horns
Last week, Sterling was unable to take advantage of a weak Dollar, settling just below 1.3000 and teasing eight-month lows against the Euro. Overall UK currency sentiment remained weak, with the surprise of last week’s Consumer Price Index (CPI) reading lower than expected knocking confidence.
With underlying pressure for an easing of government measures to reduce public expenditure and subdued growth, there is a fear of an increasing deficit on the UK economy. This poses a further threat to the UK credit rating. Further, the International Monetary Fund (IMF) said “weaker-than-expected activity” through the first three months of the year meant the UK’s growth prospect has been revised down to 1.7%, compared with an earlier 2% forecast.
This week sees limited activity in the economic headlines apart from Wednesday’s Inflation Report Hearings and Gross Domestic Product data. That said, continued talks with the EU and trade talks commencing today with the US will keep investors on their toes.
The US Dollar closed a second consecutive week with losses. Contributing to the poor sentiment was a mix of political and economic factors. Poor results in the US docket as of late and recent Fedspeak advocating for a more gradual approach when comes to tightening the monetary conditions continue to support the above, playing against any recovery in the demand for the Buck.
Troubles continue for the Trump administration, and news sources revealed that the Russian hacking scandal could now extend into Trump’s business holdings as well. Most recently, Sean Spicer, the White House press secretary, resigned. The uncertainty about the Trump administration alongside the Fed sitting on its hand saw the Greenback decline.
Looking ahead, Monday will see the flash manufacturing and services PMI figures for July from the Eurozone. Later in the day, the US flash PMI’s will also be coming out with expectations showing a relatively stable number for July.
The Euro is seen defending in the early hours of European trading this morning, as markets await the Eurozone and German manufacturing and services PMI releases for the next move.
The Eurozone and German manufacturing sector activity is expected to show a slowdown in July, which could give the EUR traders an excuse to take some profits off the table after recent solid gains were backed by a hawkish European Central Bank (ECB). Amongst the Euro area economies, the PMI reports from Germany and Eurozone as an entire bloc hold more relevance in terms of impact on the European currency and the markets as well.
The combination of asset purchases and negative rates has allowed the ECB to break the link between peripheral spreads and the exchange rate and has driven the Euro to significant undervaluation. But if the ECB doesn’t want to go on buying assets just to keep the currency down, that creates a dilemma for itself. The currency can’t stay this undervalued if they are going to taper, but the appreciation towards fair value will be a drag on inflation. How Draghi and the ECB tackle this euro-dilemma may be the biggest driver of FX trends in the coming months.
Data To Watch:
7:30am EUR Markit Manufacturing PMI (Jul)
8:00am EUR Markit Manufacturing PMI (Jul), Market Services PMI (Jul), Markit PMI Composite (Jul),
1:45pm USD Markit Manufacturing PMI (Jul), Markit PMI Composite (Jul), Markit Services PMI (Jul)