Considering Friday was the end of the month and the quarter, price action across major pairs was limited. Perhaps it was a sign of some fatigue in markets, perhaps a signal that we’re entering into real summer markets with lower volumes and quieter trade conditions. Despite the generally weaker tone for the week, major equity indices traded higher on Friday, albeit still lower on the week. The USD has shown some signs of bottoming out at 9 month lows, although we’ll need to see a lot more USD demand to call it a rally. The Euro found itself facing some selling on Friday and failure to get back above 1.1400 this morning has seen downside pressure emerge again. Even stronger than expected CPI inflation data on Friday failed to give the single currency another leg higher and in order to maintain these levels the Euro will need a consistent hawkish commentary from the ECB. Despite a broader risk off theme through much of last week, JPY was one of the biggest under performers as the BOJ show no signs of joining the stream of perceived hawkish rhetoric from other major central banks, thus policy divergence is showing JPY yields diverge and the JPY weaker across the board as a result.
It may be a quiet start to the week for the greenback, but thus far it is trying to recover from 9 months lows and USD index’s worst quarter in 7 years. Considering the rate hike and the Fed remaining relatively hawkish, the weakness in USD is concerning and a reflection of the somewhat weaker sentiment emerging from US data. Today is a shortened trading day in US markets and they are closed tomorrow for July 4th but should the dollar want any chance of recovery, this week’s data will be key. ISM manufacturing and employment data headline this afternoons’ releases. Globally we have seen some improvement in manufacturing a slight pickup through June is expected from the US. Later in the week we’ll be looking to Wednesday’s release of the FOMC minutes to gauge the Fed’s appetite on additional rate increase this year, while Friday’s Non-Farm Payrolls data will likely be the core focus for the back end of the week. There will be plenty of Fed speak throughout this week and Bullard is due to speak in London today so we’ll have half an eye on what he says, recently he spoke of weaker inflation and thus had a moderately dovish bias, let’s see if that remains.
GBPUSD is likely going to give the dollar a good fight thus week, any rally above 1.3000 area continues to run into GBP sellers, however a break above 1.3060 will be a bullish break and provide potential for more upside towards 1.3120. EURUSD has failed to hold above 1.1400, resistance higher around 1.1428 and 1.1445 has found sellers since Thursday and we are now just above light support at 1.1375. 1.1285 offers former support and we may see a bounce from there but for now downside seems favorable.
The Euro was the second best performer in last week’s trade, up against every major currency aside from GBP. The view here is perfection is being priced into the single currency and we all know that is a hard act to follow. Draghi’s comments last week now has much of the market expecting normalization, and soon, however the ECB pushed back on his comments somewhat and thus any further indication the markets has misinterpreted Draghi, could result in sharp Euro selling. We’ll be looking towards the ECB’s Praet for some guidance on this front, as he speaks in Rome tomorrow.
A shift in stance from BOE Governor Mark Carney helped GBP to one of its better weeks since last year’s Brexit vote, the central bank governor suggesting some policy tightening may be warranted should economic slack decline. It is a busy week for data from the UK as well, manufacturing figures headline this morning’s calendar and the UK has seen a shift away from services with growth seen in manufacturing over the last year, however slightly slower expansion is expected through June. Mark Carney speaks today to the Federation of Small Business, while tomorrow the minutes of last month’s BOE meeting are due for release. Given the shift in voting with more in favour of tightening, and recent comments from Mark Carney and Chief BOE economist Andy Haldane, there could be scope for additional GBP rallies. EURGBP has been driven lower by the stronger pound, last week’s high around .8880 now look to be a false break and .8747 now offers support. A break below there eyes .8733 quite quickly and the bull/bear line below that sits at .8657. A break below that level would favour a move back into the lower end of the range.