Euro driven by sentiment more than anything else
The German business climate remained subdued in June, according to the Ifo Institute. Falling global demand has led to faltering new manufacturing orders, which have pushed the industrial sector into recessionary territory. The weak PMI numbers from Friday, showing how the manufacturing sector declined by the most since the pandemic in June, has been followed by German business expectations slumping to levels normally associated with deep recessions.
However, while the first data print released some selling pressure onto the common currency, yesterday’s weaker than expected Ifo data did not. This confirms our view that the euro has been driven more by risk sentiment and stocks than by rate differentials in recent weeks. The Nasdaq fell the most last week since March, following disappointing economic data and markets pricing in less rate cuts from the Fed in the next 12 months. EUR/USD fell from $1.10 to $1.0850 in two weeks but is already up significantly today ($1.0930), following risk sentiment and stocks higher. The European Central Bank has kicked off its yearly monetary policy symposium in Sintra, Portugal, and many policymakers are expected to speak on important matters. They will most likely take this opportunity to underline the need for continued policy tightening, faced with high and sticky core inflation.
President Lagarde, Panetta, Elderson and Schnabel are on the line up today, with some policymakers having already talked yesterday. Especially the words of governing council member Matin Kazak regarding rate hikes beyond July seem to have been important in pushing the euro up yesterday. However, given the lack of economic data, global macro will most likely be the key catalyst for EUR/USD today.
Stretched positioning to limit pound’s upside?
Sterling continues to trade sideways following the Bank of England’s (BoE) larger-than-expected 50 basis point interest rate hike last week, which pushed market pricing for the peak in the UK’s key interest rate over 6%. Meanwhile, speculative positioning suggests bullish bets on sterling appreciating may be stretched, pointing to a potential period of consolidation or short-term weakness.
With UK services inflation climbing to fresh cycle highs, markets are pricing in more than 100 basis points of tightening by the BoE. In contrast, markets expect other major central banks to be nearer their rate peaks, which would typically mean the pound should strengthen due to higher yield appeal. However, the latest price action reflects growing concerns about the ramifications for economic growth in the UK, therefore limiting further sterling gains. At the same time, the latest statistics published by the Commodity Futures Trading Commission revealed that GBP long positions (betting on sterling appreciating) soared from 6,735 to 46,608 contracts in the week ending June 20 – equalling the largest net long position since April 2018. Although this highlights market sentiment is GBP positive, this so-called “overcrowded bet” might also restrict the UK currency from climbing much higher.
Key long-term daily and weekly moving averages are pointing higher for GBP/USD, which has been stuck below $1.30 for a record-long stint, but a test of these levels cannot be ruled out, with the 100-week moving average (just above $1.26) a possible downside target in the short-term.
Dollar slightly weaker before key data
The US dollar is currently negatively correlated to stocks and has therefore found it harder to strengthen amidst the risk asset appreciation of late, despite the US Federal Reserve (Fed) Chair stating more interest rate hikes will be delivered this year. EUR/USD remains afloat the $1.09 handle, whilst USD/JPY is faltering near 7-month highs.
Risk sentiment took a modest hit following the fresh geopolitical turmoil from Russia over the weekend, prompting tepid demand for safe haven currencies like the US dollar, Japanese yen and Swiss franc, but the dollar is today softer against pro-cyclical currencies in a sign that the FX market has shrugged off this uncertainty. Investors are choosing to focus more on the inflation and monetary policy outlook and will be examining the slew of US data due today. Durable goods, housing figures, and consumer surveys are due alongside the Richmond Fed manufacturing index. The prices paid sub-component of the regional Fed PMIs have all turned lower this month and if the Richmond index follows suit, it will be the lowest the regional Fed price index has been in three years. This is important as it suggests inflationary pressures in the US should continue to ease. Market participants still expect the Fed to raise its funds target rate by 25 basis points in July, but the path beyond is less clear.
If US data today comes in stronger than expected then further pricing in of rate hikes could support dollar demand but weaker data, and particularly a fall in the prices paid component of the Richmond index, could send the dollar lower.
Mixed FX picture signals lack of conviction
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 26- June 30
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
