How will sterling react to disappointing growth figures?
A currency market update from Carl Hasty, director of Smart Currency Business.
Sterling soared across the board on Friday, hitting fresh one-month highs against both the euro and US dollar thanks to a growing belief that the campaign for the UK to remain within the EU is gathering momentum. Whether or not that belief is misplaced only time will tell.
The week ahead sees a limited flow of UK economic data with only the release of BBA mortgage approvals tomorrow to provide any interest at least until Wednesday. Then, we have the release of preliminary UK economic growth figures for the first quarter of 2016; these are forecast to show a slowdown to 0.4% growth [final quarter of 2015: 0.6%]. Growth year on year is also forecast to slip to 2.0% [2.1% last year] Preliminary economic growth is the earliest data that is released, and therefore often has the greatest impact of these releases and irrespective of the latest updates on the referendum we could see sterling struggle if the data doesn’t meet expectations.
Following this, there is unlikely to be much more interest from the UK in terms of economic data and therefore the outcome of the central bank meetings in the US and Japan could have significant influence on exchange rates in the second half of the week.
Will the euro’s fortunes reverse this week?
We saw an end to a bad week for the euro on Friday, as the currency reached month lows against its rivals. This was mainly due to the European Central Bank (ECB) President Mario Draghi speech confirming that inflation won’t return to the ECB’s goal anytime soon. Friday’s poor Eurozone Markit Services and Manufacturing Purchasing Managers’ Index (PMI) data added to the weakness of the euro as they all missed expected levels, with readings of 53.2 compared to previous of 53.3 and 51.5 compared to previous of 51.8. This was disappointing for the euro, and contributes to the unlikeliness of a possible rate hike.
On Friday, the release of more in-depth information on the ECB’s corporate bond buying scheme raised questions and concerns, especially combined with breakthroughs in the Greek debt talks that indicated an easing of said debt. This contributed to the euro having its worst day for nearly two weeks, and capping off its worst week in over a month.
We expect little movement within the euro due to the lack of data set to be released. We have the German IFO meeting with expectations for an improvement, across the board, in business climate, current conditions and expectations. Later in the week we have Eurozone inflation figures and preliminary estimates for first quarter growth. Both sets of data are expected to show a slight improvement when compared to the previous quarter but a slight fall year on year.
A plethora of data released this week – will it be good news for the US dollar?
The US dollar weakened slightly on Friday thanks to sterling strength, and weaker-than-expected Flash Manufacturing Purchasing Managers’ Indices which fell to the lowest level on record.
Investors will be looking forward to a week with plenty more data releases than the last week. On Tuesday, we see the release of Durable Goods Orders – and this is expected to post growth for the first time in two months. The spotlight however will be on Wednesday and the US Federal Reserve interest rate decision; this is expected to remain the same, and the statement that follows will be very carefully scrutinized for possible hints as to whether or not US interest rates will be raised at Junes meeting. On Thursday, we can look forward to the Advance Gross Domestic Product (GDP) figure for the first quarter which is expected to show growth but significantly less than the previous quarters. To end the week, we will see the release of personal spending and personal income; both are expected to show growth on the previous months’ figures.