Raphael Sonabend, FX Analyst
The euro continued its advances against the majority of counterparts yesterday as Draghi delivered a confident testimony on monetary policy. Draghi denied that the ECB was blackmailing Greece in any form and refused the notion that QE could lead to countries abandoning economic reforms. His own confidence was reflected in the euro whose index saw a strong increase throughout the day. A volatile day lies ahead with UK CPI at 09:30 and US CPI at 12:30. The UK figures are forecast to fall to 0.1%, a low result that in theory should bring Sterling weakness. Unfortunately in practice, we have recently seen Sterling strength after low CPI data and there is therefore the possibility of strong gains. With the chance of strong movements in either direction, all that can be truly known is that volatility will be seen, with the potential to drag on throughout the day’s trading.
GBP/EUR: Currently trading at 1.3615
- The euro gained on the pound throughout yesterday’s session, aided by Draghi’s testimony on monetary policy in the afternoon. When faced with the controversial question is the ECB blackmailing Greece? Draghi quickly replied with “let me disagree with about everything you said” and after being criticised about QE and the possibility that it will lead to governments abandoning economic reforms, Draghi’s response was simple, he “begged to differ”. Draghi’s cool replies and abundance of rhetorical questions, created an air of confidence that is not usually seen around the usually dovish ECB president. In a series of hawkish responses Draghi flashed his talons, but euro bulls will expect a complete metamorphosis from dove to hawk before a full recovery is seen.
- Today’s focus will be on UK CPI this morning. Forecast to fall from 0.3% to 0.1%, a result of 0.0% or below is a real possibility. A result signifying deflation should bring Sterling weakness however given trends following previous CPI releases, strength has been seen. We therefore anticipate Sterling volatility and significant movement but the direction of which is unpredictable.
GBP/USD: Currently trading at 1.4959
- Yesterday saw trading close barely above opening after a volatile morning was seen. The day began with dollar strength pushing the rate below the 1.484 mark however Sterling recovered lost ground and closed the day around 1.495. Stanley Fischer, the dovish Fed vice Chair, stated that a rate hike is ‘widely expected’ to happen this year however risks remain as the dollar is still too strong. In a confident speech, nothing particularly new was said but this is still one of the most explicit hints we’ve had regarding monetary policy from someone high up in the Fed.
- CPI data from the UK and US will be released today but the UK’s data is likely to take priority. Strong movements are expected following the release of the UK’s inflation data and with the possibility of deflation being seen, volatility is likely as well. With US CPI forecast to increase on a monthly basis, this is only likely to impact upon the pairing if Sterling weakens in the morning.
EUR/USD: Currently trading at 1.0977
- Euro gains continued yesterday against the dollar, closing the day a cent above opening. Draghi’s words in the afternoon saw limited effect on this pairing but releases this morning have aided further euro strength. French manufacturing PMI this morning rose from 47.6 to 48.2 and the German manufacturing PMI also increased, from 51.1 to 52.4. Services PMI from Germany registered a similar increase. As the PMI figures continue to increase, especially in Germany, so too will Eurozone confidence and euro strength.
- Strong figures this morning should allow the euro to continue to climb at least until midday. US CPI figures are forecast to rise from -0.7% to 0.2% and core CPI is forecast to fall from 0.2% to 0.1%. CPI is usually considered to be ‘more important’ and we may therefore see the dollar resist further euro gains if the data comes in line with, or exceeds, expectations.
GBP/AUD: Currently trading at 1.8983
- Aussie strength pushed on yesterday, gaining two cent against the pound as a quiet day aided the Australian dollar. Aussie gains were halted briefly this morning as the Chinese HSBC flash manufacturing PMI figures saw a fall from 50.7 to 49.2. This result, which is below the crucial 50.0 mark, signifies a contraction in the sector and reignites worries about the continuing slowdown. Whilst the pound gained half a cent on the back of this release, the Aussie has already recovered this lost ground.
- Focus today will be on UK CPI figures this morning. Volatility can be expected to follow this result and for Sterling to recover any ground recently lost to the Aussie, a result above expectations will be needed.
GBP/NZD: Currently trading at 1.9529
- Following similar trends to other commodity currencies, the Kiwi gained throughout yesterday’s session against the pound. A quiet day on the data front aided further Kiwi gains.
- Trading today will focus on UK CPI this morning before turning to NZ trade balance tonight. The UK data is forecast to register at 0.1%, dangerously close to the 0.0% mark, and volatile trading can be expected. The NZ figures are forecast to increase from 56M to 375M, a big increase that should lend a hand to NZD strength if accurate.
GBP/CAD: Currently trading at 1.8682
- After early-morning Loonie gains, this pairing moved within a relatively tight range yesterday as the week begun on a quiet note.
- Ahead of today’s UK CPI data the pound is trading on a weaker footing. UK CPI is forecast to drop to almost zero, which is likely to bring volatility in this pairing.
Subscribe to our morning, weekly or monthly reports here and make sure you never miss an update: https://www.caxtonfx.com/currency-banking/the-caxton-account#Free-currency-reports
This blog is prepared by Caxton FX Ltd for information purposes only and may contain personal views that are not the opinion of the company. This is not an offer to purchase or sell any security or an investment advertisement. Caxton FX Ltd is authorised and regulated by the Financial Conduct Authority, although foreign exchange transactions with Caxton FX are regulated by HM Revenue and Customs. This email does not constitute advice for any foreign exchange transaction, nor is it intended as a solicitation for funds or recommendation to trade.
