Sterling Slips as Markets Refocus on Monetary Policy

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The main story this week has been the US Dollar. A lack of significant tradable economic data out of the UK and EU has seen Sterling and Euro languish. Sterling in particular has been under pressure as the post-election glow in the unit fades. GBPUSD has declined every day this week and has now almost slipped back to pre-election levels as FX markets refocus on monetary policy.

Based on official forecasts, the Bank of England (BoE) is not expected to hike rates until 2016, meanwhile the Federal Reserve (Fed) is on track to hike rate in the back end of 2015. The prospect of relatively higher investment returns in the United States stimulates demand for the Greenback at the expense of Sterling and biases GPBUSD to the downside.

The common currency has been in defensive more this week also as the lack of data has made room in headlines for Greece, which faces the real prospect of default in the next few weeks. Greece is due to repay 1.2-billion Euros of debt between now andJune 12th and has said that it quite simply doesn’t have the cash on hand. EURUSD slid to 1-month lows this week and is now approaching the 12-year lows touched back in March as nervous sentiment persists. The soft Euro sentiment pushed GBPEUR to 2-month highs this week, with its eyes on the multi-year high at 1.4250. While this pair has pulled back somewhat as the week draws to a close, looking forward risk remains to the high-side, particularly as the prospect of interest rate hikes in the UK grow nearer.

After a quiet data calendar this past week, the coming one offers a lot more to be excited about. The week kicks off with the UK Purchasing Manager’s Index series, which gauge the relative economic health of Britain’s manufacturing, construction, and services sectors. These leading indicators, when taken collectivity, offer good insight into what can be expected for broader inflation and employment related data. The Services sector is Britain largest contributor to GDP and generally receives the most attention. Lately the results have been encouraging as they trend higher. Given recent concerns about soft inflation a strong services PMI reading will be important for Sterling’s performance next week. This is especially true versus the American Dollar where the fading glow of the election related political certainty in the UK weighs on the pair.

The headline data events next week however at the European Central Bank (ECB) monetary policy announcement and American Employment statistics. Note that the BoE will also be making a monetary policy announcement; however governor Carney has be quite transparent that no policy changes should be expected in the near term. As such currency market will likely look past the event. Similar to the BoE, the ECB is expected to remain sidelined this week also. However whereas the BoE tends not to give rate guidance at times when no policy change occurs, ECB president Mario Draghi is scheduled to give a press conference and answer journalist questions. No doubt there will be a large emphasis on the impact of QE on Eurozone inflation and how it is influencing the ECB’s monetary policy outlook. No fresh sentiment changing news is expected, however the event itself tends to stimulate excess rate volatility in the common currency. Additionally, given the near-term possibility of default, Greece debt concerns are likely to be raised also.

Finally on Friday American employment data will be released. Expectations are that 224k fresh jobs were created in May, largely matching April’s 223k result. Additionally it is expected that the unemployment rate in the United States will hold steady at 5.4%. Fed chair Janet Yellen has emphasized the data dependent nature of American monetary policy in the near term. This has resulted in elevated currency volatility surrounding local economic data releases. Given that the non-farms data is perhaps that most important data event of the month, the possibility of large rate swings Friday afternoon is elevated. Contact your Cambridge Global risk specialist to discuss proactive strategies to manage next week’s economic data in the context of your currency exposure.

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About Author

David Starkey is a currency options dealer and market analyst for Cambridge Mercantile Group. A fascination with the everyday impact of globalization on society led David to pursue a degree in International Business from the University of Victoria. From there Forex was a natural fit. He has worked as a currency trader, risk manager, and hedging expert in both Canada as well as the United States for several non-bank brokers. Cambridge Mercantile Group.

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