With the attention of market participants focused so intently on central bank policy decisions and the relative trajectories of monetary policy, the past week ended up being fairly boring for the Euro, while Pound traders had more data to decipher.
The upcoming week will prove to be more interesting for the EUR, as the majority of the past week was spent philosophizing on the implementation of the ECB’s non-conventional monetary policy actions, and the weakness in the first quarter for the American economy. A drastic contraction in GDP growth for the American economy had the big dollar on the defensive for the better part of the week, as traders reduced their exposure to the USD on expectations the Fed’s loose monetary policy wasn’t in danger of tightening anytime soon.
The overall softness in the DXY helped the EURUSD pair move back into the 1.36s, essentially coming full-circle from the ECB’s policy announcement at the beginning of June. While the upcoming Governing Council meeting of the ECB at the end of next week will likely prove to be a non-event as the most probable scenario is one in which Draghi and Co. want to evaluate the new monetary policy measures before looking to tweak or add anything, the economic data in the early part of the week will give market participants some interesting data to interpret.
The flash reading of inflation for the zone in June is due out on Monday, along with Money Supply and Private Loan growth, with all three being major indicators the central bank is keeping an eye on and hoping to reinvigorating some sort of upward momentum into each. Private loan growth is expected to see its downward spiral abate somewhat, while inflation is forecast to tick-up by a tenth of a percent, but instead of influencing the ECB decision on Thursday, the data will be more useful to see what sort of hole the targeted LTROs and ABS purchases will have to dig out of in order to grease the monetary policy transmission mechanism.
While price action was subdued like many other major currencies, GBPUSD at least had a bit more action on the central bank side of things this week, with a few key releases that had Pound traders scratching their head in search of direction. Early in the week Governor Carney and other members of the BoE commented on the release of the Inflation Report, saying that more slack in the economy needed to be absorbed before rates could rise. Then on Thursday when the Financial Stability Report was released, the macro-prudential policies aimed at curbing excessive mortgage lending were a little softer than anticipated, leaving traders to believe that interest rate policy would be left to do the heavy lifting to make sure the housing market doesn’t run out of control.
The main take-way from this week is that the BoE remains data dependent in regards to when the normalization of policy will begin, much like the Federal Reserve, although it continues to look like we’ll see dissenters on the MPC voting committee later this year. Even though there is little notable central bank events to directly influence the Pound next week, look for external events such as the EZ inflation reading to impact GBPEUR, while Non-Farm payrolls in the US on Thursday will leave an impression on GBPUSD.
As the Chunnel (GBPEUR) is taking a bit of a breather from its multi-year high, it seems as if a short-term consolidation could be in the cards for the pair, given that the wide divergence of monetary policy actions is well priced into both the Pound and Euro. While we expect there are further gains to be had in GBPEUR over the latter half of 2014, we will likely have to see more concrete plans about when we can expect the first rate hike from the BoE.
More: Weekly forex forecasts
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