FX Weekly Update: US Dollar Continues To Strengthen

OPTFX – Weekly Update and Outlook

USD - The US Dollar continued to strengthen overall last week, with the US Dollar Index extending its bounce higher from the 2014 lows seen in early March. Although we are still a long way off the high levels seen in mid-2013, signs are supportive enough to suggest that further improvement in the American economy will equate to steady FOMC tapering of asset purchasing measures going forward and therefore a stronger greenback with it. Gains were predominately made against the EUR and GBP, whilst the USD relinquished ground made earlier against the JPY and failed to make ground against the AUD and CAD. Last week was always going to be dominated by the headline American non-farm payrolls data on the Friday. Before that, trading conditions were subdued, despite US economic data generally falling just short. On the Tuesday, ISM manufacturing PMI failed to inspire, showing improvement from 53.2 to 53.7, but failing to match forecasts for 54.0. Private sector ADP payrolls on the Wednesday reported at 191k jobs added for March, only slightly under consensus for 195k jobs added. And ISM services PMI on the Thursday almost mirrored the manufacturing equivalent seen earlier in the week, rising to 53.1, but just missing expectations for a 53.5 reading. As mentioned above, non-farm payrolls was always going to be the highlight; 192k jobs were added to the American economy in March, just shy of 200k expected, prompting limited weakness to the USD to end the week.

Outlook – Last week saw a strong pattern of US economic data showing decent improvement from the previous month, but still falling short of official forecasts. This would suggest that analysts are perhaps expecting too much, too quickly, whilst market participants appear to be willing to take encouragement from any form of upside seen in the US economy to support the scenario of steady Fed tapering. This week sees little of interest from America, with the only highlights siding with FOMC meeting minutes on the Wednesday and the release of the US Producer Price Index on the Friday.

EUR – The single currency last week lost further ground, something that is becoming more of a trend than a short-term retracement. The highlight last week from Europe was the ECB meeting on the Thursday, with rates being left on hold at 0.25%, but with the post policy meeting press conference moving more in sync with recent rhetoric from various ECB officials. Central Bank President Draghi stated that the governing council was “unanimous” in its willingness to use unconventional tools to battle the risks of low inflation, whilst adding that negative deposit rates were also discussed. EUR/USD fell to its lowest levels since February. The rest of the week saw a general spate of poor news for the bloc. Inflation data on the Monday, manufacturing PMI on the Tuesday, Eurozone GDP on the Wednesday and services PMI on the Thursday morning all fell short of expectations. German figures were the most disappointing, something that won’t lend too much hope for prosperity if that trend continues.

Outlook – This week provides slim pickings on the economic calendar for Europe, with German trade balance on Wednesday perhaps supplying the most notable data set. Expectations are for their trade surplus to widen, but this might be optimistic considering the notable contraction seen last month.

GBP – Like the EUR last week, the GBP weakened in tandem, with EUR/GBP moving almost sideways, but the GBP losing ground against all other major counterparts. Unlike Europe, the UK is due to hold their monthly monetary policy meeting this week, so unlike Europe, the GBP was more influenced by economic indicators; and generally they were all fairly disappointing, with mortgage approvals, manufacturing PMI, the Nationwide house price index, construction PMI, services PMI and the Halifax house price index all missing the mark. Indications of a stretched UK economy are beginning to emerge, and although there is little to suggest that a more enveloped set back will ensue, recent developments are probably enough to remove optimism for a sooner than next year rate hike.

Outlook - This week as mentioned above provides the Bank of England MPC meeting and one probably shouldn’t expect too much at all. The BOE have already set out their mandate, moving away from unemployment targets and more towards less transparent “spare capacity absorption” assessment. Signs of flagging economic performance from last week would suggest that the central bank will simply reiterated their mandate. Other points of interest include manufacturing production data on Tuesday (+0.3% month on month expected) and UK trade balance data on Wednesday (a mild narrowing of the deficit forecast).

Wishing you all a good week from all at OptFX.