It was another strong week for the American Dollar as both local data and global risk sentiment fueled strength in the Greenback. On-going Ukraine concerns as well as news that the United States sent bombers into Iraq turned the appetite for risk sour, sending funds into safe haven currencies like the USD and JPY.
Demand for Greenback in particular was reinforced by better than expected PMI, unemployment claims, and trade balance numbers all published this week. This was not good news for the GBPUSD, which ground lower again this week. Sterling was already on its back foot following disappointing UK Manufacturing Production numbers, so the impact of ongoing USD interest was particularly strong. From here Cable seems to have an eye for May 2014 lows near 1.6700.
A surprise nod to the risks that the crisis in Ukraine poses to the EU from European Central Bank (ECB) President Mario Draghi combined with retaliatory sanctions from Russia on Eurozone farmers have put the Euro on defense this week. As expected, the ECB held steady on monetary policy this week and Draghi was his usual vigilant and ‘willing to act’ self. However markets were caught by surprise when Draghi singled out the economic risks to the EU associated with Ukraine.
In reference to the central European nation Draghi noted the “risks to the recovery were on the downside to begin with, and certainly one of these risks would be the geopolitical developments”. The comments from the ECB President were timely. In retaliation for sanctions against the Russian banking sector, this week Russia moved to block food imports from the EU, USA, and other western countries.
The surprise ECB reference to Ukraine and Russian sanctions along with USD demand helped lead EURUSD down to its lowest level since November 2013. Losses in this pair since it touched multi-year highs a couple of months ago are now close to 700-pips, giving Euro- buyers something to celebrate. There is some decent support in this area, which could lead to a consolidation next week. However the outlook for this pair remains negative due to contrasting interest rate expectations in the USA and EU.
It was unsurprising that when the Bank of England (BoE) held steady on monetary policy this past week Governor Carney opted to not make any accompanying statements. This was in part driven by the knowledge that this coming week the BoE will present its quarterly Inflation Report. Wednesday will see Carney roll out the BoE’s economic projections for the next 2-years. Expectations are that the projections will reveal a cautiously optimistic BoE which sees the UK economy on track to emerge from the worst recession in decades.
Investors will dissect Carney’s every word for insight into when interest rates in the UK might start to move higher. Given that data has largely been in line with the BoE’s previous projections many expect the first rate increase in early 2015, perhaps even late 2014. Clarity on the all-important first rate hike will be the primary item on the minds of investors on Thursday. However in true central banker-esque style Carney is likely maintain his well-rehearsed vague position on the specifics of what future monetary policies may look like, specifically the schedule of rate hikes. This arguably affords Carney the flexibility to react to any unforeseen changes in the economic landscape.
On the subject of British economic events, next week also sees employment statistics. Expectations are that 30k less Britons received unemployment benefits in the month of July as compared to June, helping to guide the unemployment rate down to 6.4%, its lowest level since March 2009. However expectations are that the pace of wages growth in the 3-months ending in June was a disappointing -0.1%, its lowest level in 5-years.
Policymakers in the UK have long decried the wages growth situation, which is currently less than inflation. This means that in real terms British wage earners are actually having their purchasing power eroded. While the headline unemployment number is encouraging, the declining wages growth results are getting more and more attention every month. If data shows that in fact wages growth continued to fall, it could be a significant risk to an already on-the-ropes British Pound as it throws the BoE’s appetite for interest rate hikes into question.
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