Post date: 30/04/2018 08:00
At the beginning of the week the Pound hit the best levels to buy Euros in almost a year as talks of an interest rate hike gathered pace. The Pound did drop slightly vs the single currency during the middle of the week, but still remained close to the highest rate to buy Euros since May 2017. UK inflation levels fell from 2.7% to 2.5% but they are still higher than the Bank of England’s target of 2%, thus creating more reasons for an interest rate hike. Average earnings came out higher than inflation levels and this has helped to boost consumer confidence. Bank of England governor Mark Carney came out to suggest that an interest rate hike may not be coming as soon as many expect. This made the Pound drop even further.
Although we have seen Retail Sales fall in the UK, this is likely due to the heavy snow conditions. These conditions caused havoc for the UK recently. With unemployment close to record low levels and average earnings above inflation, the Bank of England may have enough justification to raise interest rates. The main question is whether they will raise rates in May. To finish the week we had Gross Domestic Product data which was due to come out 0.4% higher than predicted. The result was, however, only 0.1% higher which created more GBP weakness across the board.
Eurozone macroeconomic news was fairly light this week. The current account data was not enough to provide the impetus Euro bulls with what they were looking for. With no real major announcements scheduled in the Eurozone, investors will have one eye on next Thursday’s European Central Bank meeting. We expect the ECB to maintain its fairly cautious stance with regards to future policy tightening, given the recent weak inflation and PMI data coming out of the Euro-area.
Investors will be looking to President Draghi's comments over the possibility that the bank could hint (in the summer) that it's ready to end its QE programme later this year. The euro was able to advance against a number of its peers as it exploited the weakness in risk appetite, allowing EUR to offset some weak data and push higher. The euro initially strengthened at the start of last weeks session. This was due to some broad-based weakness in the US dollar prompting an uptick in demand for the single currency.
The main focus for EUR investors this week was undoubtedly the ECB’s latest rate decision on Thursday. Draghi said the rates will remained unchanged for some time and they will continue bond buying (€30bn a month) until September. ‘’Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “Europe remains firmly in a period of growth, but lately we’ve seen momentum slow significantly. While this shouldn’t be anything to worry about, it’s certainly not the right time for a change in monetary policy.’’
A sharp increase in US Treasury yields provided some decent support for the US Dollar. 10 year government yields rose above 2.9% after more talk of denuclearisation in North Korea and encouraging US data. Jobless claims data came mostly in line with expectations, while the Philly Fed survey rose to an above forecast 23.2, from 22.3.
After some initial setbacks the US dollar was able to strengthen against the other majors last week. This was due to an uptick in US treasury yields and falling demand for riskier currencies driving investors towards USD. The US dollar found itself on the back foot at the start of last week’s session, with USD/GBP falling to a new multi-month low. This was despite a stronger-than-expected rally in Monday’s US retail sales figures. Rising US treasury yields however, as well as some hawkish remarks from a number of Federal Reserve policymakers, lent strength to USD in the second half of the week. This allowed the US dollar to take advantage of market risk aversion to close the week on a high.
The US has had a very good week data wise. Initial Jobless Claims and Durable Goods data yesterday beat expectations. This created gains against other major currencies. So now that Donald Trump’s antics have died down and with their economy still performing, we could see the USD continue to strengthen.