Fading economic growth momentum weighs on Sterling

In a reversal of recent fortunes Sterling was on the back foot towards the end of last week, falling against most major currencies as fading economic growth momentum lead to decreased optimism regarding the UK’s future prospects. Sterling is now being viewed as a less attractive investment vehicle as market participants become increasingly concerned that the UK economic growth is waning. Indeed construction output actually shrank 1.1% in May from the previous month when estimates predicted a 0.8% increase. The recent Sterling rally and strength can be attributed to investor confidence in the resilience of the UK economy and the recent reports are hurting this sentiment significantly. Looking forward to this week, expect Sterling’s movement to be dictated by the CPI y/y, which is considered the UK’s most important inflation data and is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate. It could be argued that inflation is the last key proviso to an interest rate hike and this release could be very influential. On Tuesday Carney is also due to speak, which will be heavily scrutinised and deciphered for any clues regarding future interest rate policy – especially as Carney has been known to overtly speak his mind at these gatherings.

The Eurozone was on the cusp of another scandal last week following the alert from Portugal regarding its banking sector – and in particular accounting irregularities at one of the country’s largest banks – causing investors and market participants to once again conjure up that dreaded word ‘default’. Following the alert Angela Merkel announced that this latest banking crisis underscores the euro regions fragility and indicates the need for regional governments to respect debt and deficit limits. It is important to note that the ECB monetary stimulus plans are in place to stimulate the economy in the Eurozone, not be used up as bailouts. Also weighing on the single currency is the recent French and Italian industrial data, which confirmed the suspected problems with economic growth in the second and third largest economies of the euro zone. A relatively quiet week beckon this week for the Eurozone, but today ECB president Mario Draghi is scheduled to testify on monetary policy before the Committee on Economic and Monetary Affairs of the European Parliament, which will be heavily scrutinised for interest rate clues. Tuesday also heralds high impact data in the form of the German ZEW Economic Sentiment.

The US Dollar was on the offensive last week despite further dovish comments from the FOMC. It seems the gains stemmed from risk aversion following the banking crisis in Portugal, which continues to threaten to leak into other nations in the Eurozone. The FOMC disappointed the market by not providing a clear guidance on timing of a potential Interest rate hike, instead implying that an economic recovery and any subsequent monetary tightening are anything but guaranteed. A huge week beckons this week for the Dollar data wise, which means the currency could finally build some momentum. On Tuesday and Wednesday we high impact data in the form of Retail Sales m/m and PPI m/m respectively. This is followed on these days by testimony from FED chair Janet Yellen on the Semi-annual Monetary Policy Report. The week is rounded off with further unemployment claims data and consumer sentiment reports towards the end of the week.