By Jameel Ahmad, Chief Market Analyst, FXTM
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The relentless mixed sentiment towards the USD has continued to work in the favour of the Pound bulls and resulted in the Pound/Dollar climbing to a monthly high at 1.5597 at the end of last week. Over the past couple of weeks, UK economic data has been far lower in volume than the United States, so the USD has also been playing a more active role in guiding the direction of the Pound. With that said, the latest UK inflation reading is scheduled for release on Tuesday and market reaction towards the data is expected to be pivotal in deciding which direction the Pound/Dollar continues to trade throughout June.
We have seen a recent improvement in inflation readings around Europe, meaning it would not be unrealistic for an upside surprise to be found from the UK inflation data. While this would be bullish for the Pound, investors should keep a close eye on the core inflation numbers because these have also been unexpectedly weak in recent months suggesting that UK inflation risks stretch further than depressed oil prices. If UK inflation continues to remain weak, we can also expect the BoE’s views on inflation to stay dovish with this meaning that the UK interest rate expectations will continue to be pushed back for at least the next year.
Looking at the GBPUSD from a technical standpoint, the Pound bulls will be hoping for encouraging news from the UK economic data because they have finally surpassed the stubborn 200-day moving average, with this being the bulls’ best chance of advancing back within reach of its 2015 highs in May. Bullish momentum for the Pound would also be seen as adding further bearish pressure to the EURGBP, which has dropped from 0.7387 to 0.7195 in under a week and could still realistically fall back to 0.70. Investor sentiment towards the Euro still hinges on the ongoing Greece negotiations, meaning that the EURGBP remains vulnerable to downside pressures.
Speaking of the Euro, sell-on rally has been the name of the game when it comes to the EURUSD. Traders are enjoying the opportunity to enter selling positions on any possible over-extensions when it comes to the EURUSD, and we pulled back from the near 1.14s to trade as low as 1.1150 once again last week. German Chancellor Angela Merkel inspired bearish pressure on the Euro when she expressed that its current high valuation would make it more difficult for some European nations to conduct structural reforms, but with the ECB’s Coeure also making dovish comments a few weeks back when we were also approaching 1.14, it is clear that there is some unease over the appreciating Eurodollar.
There are a variety of reasons to expect the Euro to remain weak, and the dovish comments from senior figures like Merkel and Coeure are just one of them. Greece remains a constant risk to investor sentiment and we are now just two weeks away from a possible Greek default. It is widely known that Athens is desperate for cash, but with time running out to agree a new deal with creditors, investors should expect all headlines to continue focusing on Greece negotiations. Optimism emerged once again last week that a deal is close to being finalised after Germany’s stance reportedly softened, however this was later contrasted with reports that Germany is no longer ruling out a potential Greek default.
Either way, the announcement that IMF officials walked away from negotiations with Greece just highlights how far we all are from a conclusion to this lengthy saga.
Although there is US economic data scheduled for release this week, there might not be much of a reaction because traders are going to be focusing on Wednesday’s FOMC decision. I expect the USD to gain before the FOMC decision, because there will be traders tempted to purchase the USD on the outside chance that the Federal Reserve might shock the financial markets with a US interest rate rise. The chances of a US interest rate rise seem minimal, but traders might find encouragement from knowing that the currency markets would be completely unprepared for such an outcome and the subsequent dramatic USD rally.
I would like to see the Fed provide clarity to investors on when it will be raising interest rates, and pre-announcing an interest rate rise for September would be a smart move. There are multiple benefits to doing this with the obvious one being that the markets would finally receive clarity on the timing of an interest rate rise, which is something they have been waiting for. Such a move from the Fed would also provide a huge favour to emerging markets, especially when you take into account that it would allow central banks to prepare in advance for capital outflows while at the same time also preventing continuous currency pressure.
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