GBP/USD lost quite a bit of ground this week, falling from 1.6880 to a low of 1.6698. The news that Pfizer had pulled out of the running to buy AstraZeneca dragged on the pound early in the week, a somewhat delayed reaction as London and US markets returned from a long weekend. Amid a lack of any top-tier UK economic data this week, cable broke lower through various stop loss levels, with end of month related buying in EUR/GBP accelerating the losses.
The move was also prompted in part by BoE Governor Carney’s failure to make mention of monetary policy and the future path of interest rates in a speech on Tuesday evening – the market was half expecting him to touch on this, but was left disappointed.
By Alex Edwards at UKForex, an international money transfer service
The dollar was generally stronger, too, benefiting as a result of the sell-off in gold and strong data. US Durable Goods Orders printed stronger than market expectations at +0.8% for April vs. exp. -0.5%. This supported dollar strength during the early part of the week. The Fed’s Lockhart was on the wires on Wednesday, saying that he expects the US economy to rebound to a q/q growth rate of 3%, again relatively supportive to the greenback.
The second estimate for US Q1 real GDP came in at -1.0% vs. an expected -0.5% on Thursday, showing that the US economy contracted for the first time in three years. US bond yields dropped, but equity markets shrugged the bad news off, as investors seemed to prefer to take a positive and forward-looking approach to trading. GBP/USD was also largely unaffected and continued to find good support at and around 1.67.
The euro continued to weaken last week and broke below 1.36. ECB President Draghi was speaking on Monday and sounded dovish on monetary policy, reinforcing expectations for an interest rate cut by the central bank and/or QE. He commented that “what we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries.”
The ECB’s Nowotny reinforced this message and said that there had been discussions about cutting interest rates at next week’s meeting. Yves Mersch followed up on this later in the week and said that “what we’ve been doing is broadening our toolbox and we will present some of these findings to the Governing Council.” This was interpreted by the market as just another way of saying that a combination of measures, not just interest rate cuts, could be produced at the meeting on 5th June.
Overall, the European data released has been weak, too, particularly French Consumer Spending, German Unemployment data and German Retail Sales. We might well be in for more of the same next week.
Next week, the ECB monetary policy meeting and accompanying press conference will obviously be the main event, and we’re more than likely to see volatility close to and after the event. European Flash CPI is released in advance of the meeting and will be crucial to underlining market expectations for action by the ECB on Thursday, whether by cutting interest rates, QE, or a mixture of both. UK PMIs are due, and if they beat forecasts, we will likely see GBP/USD recover back through the 1.68 level.
The Bank of England monetary policy announcement is also due, but it’s probably going to be a non-event, as expectations are for rates to remain on hold. US Non-farm Payrolls will cap off a busy week. With the jobs data being strong last time, USD bulls will be looking for more of the same this time around.
Further reading: The US dollar advanced modestly in May
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