The British Pound has enjoyed a strong week as both the GBPEUR and GBPUSD (Cable) traded with firm footing thanks to bolstered sentiment. The revived Sterling interest stems from better than expected Consumer Price Index (CPI) and Retail Sales results this week.
On Tuesday data showed that consumer prices (inflation) in the UK grew at an annualised rate of +1.8%, which is better than both market expectations of +1.7% and last month’s reading of +1.6%. CPI has declined steadily from near 3% in the later part of 2013, which has been a concern for the Bank of England (BoE), who maintain a target inflation rate of 2.0%. This week’s result was welcomed by investors and the BoE alike, as it signals that the kind of declining inflation we’ve seen over the last 9 months or so may be starting to reverse. Retail Sales on Wednesday also posted better than forecast results, printing month-over-month growth of +1.3% against expectations of +0.5%.
One point to observe is that despite the positive data this week and the subsequent bounce off of monthly lows last week, gains in Cable have been rather limited. In fact, the pair’s entire weekly range was little more than 100-pips. While it is trading near multi-year highs, the lack of material gains this week nods to the theory that the multi-month rally this pair has enjoyed might be on its last legs. Put another way, given the epic rally in GBPUSD rates over the last year, markets could be moving towards a place where they’ve fully priced optimistic economic expectations for the UK; meaning that going forward gains could be harder fought.
GBPEUR’s performance this week has also been strong, the pair marching higher again and touching fresh 16-month highs; aided both by improved Sterling interest as well as worsening Euro sentiment. In fact the Euro looks to be wrapping the week up on a soft note following disappointing PMI data. Purchasing Managers’ Index survey results for both the Manufacturing and Services sectors of the Eurozone were mixed, with a few specific disappointments drawing the attention of investors and in turn defining the overall sentiment. Most notable among the data misses was French Services and Manufacturing results. Both of which printed below the critical 50.0 threshold, suggesting that surveyed managers feel their industry is in a state of contraction.
The worsening sentiment also drove EUR$ to its lowest since mid-February this week. This pair has now given up almost 4 big-figures since taking a run at 1.4000 early in May, as fortunes for this pair have reversed drastically in the last few weeks. The declines are primarily due to comments from European Central Bank president Mario Draghi, who signaled that a strong Euro may be the trigger for further accommodative monetary policy. The next major support in this pair comes in at 1.3475, which represents historical support from late January/ Early February.
It’s a light data calendar heading into the last week of May due to bank holidays in the USA & UK on Monday, and the EU on Thursday. The situation is compounded by a lack of top-tier data from either the EU or UK the entire week. Meaning that both Sterling and Euro are likely to take direction from broader market sentiment, and in particular US Dollar (Greenback) activity. With that in mind there are 2 pieces of American data that have the potential to impact currency markets; first up is Durable Goods on Tuesday and then Q2-2014 GDP on Thursday.
Expectations are that Durable Goods figure, which, excluding transportation items like airplanes, measures the volume of new orders placed with manufactures, will post +0.6% month-over-month growth, against last month’s reading of +2.0%. A healthy manufacturing pipeline is a key element to strong economic growth and thus the timing of any future monetary policy changes from the Federal Reserve (Fed), which directly impact USD values. As for Thursday’s GDP, markets will be looking for a rebound from Q1’s reading of +0.1%. Over the last year or so, the annualised GDP has consistently published in the upper +2% area, both the Fed as well as investors will likely need a result is consistent with that to support current monetary policy guidance.
Further reading: How not to regret a trade
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