By GrowthAces.com
EUR/USD: Downside Risks In The Short-Term Perspective
- Last week’s FOMC statement has not changed the fundamental picture, but added to the probability of the first rate hike coming in September. Together with a good second-quarter GDP release and significant positive first-quarter GDP revision, this has supported the USD. On the other hand, the rates market is still only pricing in a 40% probability of a September rate hike and a full 25 bp hike is priced in by year-end.
- If economic numbers in the US next week, particularly non-farm payrolls on Friday, come in solid, as we expect, re-pricing towards September is very likely. We think that from a short-term perspective, this poses upside risks for the USD. That is why our strategy will be to go short again on the EUR/USD at the beginning of this week.
- But in the medium- and long-term perspective we expect the EUR/USD to go up, due to better macroeconomic data and acceleration in inflation in the Eurozone.
GBP: Let’s Get Ready For Big Thursday
- On Thursday, 6 August, the BoE will for the first time simultaneously publish its policy decision, the minutes of its meeting, including the votes, and the Inflation Report (11:00 GMT), which will be followed by the Inflation Report conference. We expect no change in the monetary policy stance, with the Bank Rate unchanged at 0.5%.Indeed, in the last month there has been a hawkish shift on the Committee. The Governor, Mark Carney, has said that the decision to increase interest rates is “moving closer”.
- The immediate focus for investors on the release of the minutes of the August meeting (at 10:30 GMT) will be on the votes, that is, whether there is dissent and, if so, to what degree. We expect at least two dissenters and probably three, but even four votes for a 25 bp hike cannot be excluded.
- Indeed, the July minutes revealed that more than two members are close to voting for a rate hike, and may have voted for a hike at the July meeting if it were not for the escalation of the Greek crisis. In addition to the well-known “finely balanced” position of the two hawks, Martin Weale and Ian McCafferty, David Miles appears to have now joined that group. Miles, who will leave the MPC at the end of August, was widely seen as a “dove”. He has never voted for an interest rate hike since joining the BoE in 2009, but he said: “As conditions change you change your view on what is right; and things have changed a lot in the UK in the past year or so and very largely for the better.” That is why we think he will also back interest rate hike at his last MPC meeting.
- Kristin Forbes is another member who has sounded “hawkish” in the past. If there are three or more dissenters, then our view is that it will be taken as a “hawkish” signal by the markets.
- The “hawkish” shift on the MPC has been triggered by generally positive news on the domestic economy, and in particular the pickup in wage growth. Earnings growth in the United Kingdom jumped to 3.2% yoy in the three months to May, up from 2.7% yoy in the three months to April. UK GDP growth accelerated to 0.7% qoq (2.6% yoy) in the second quarter, up from 0.4% qoq in the previous quarter. 0.7% qoq growth fulfills one of Mark Carney’s three preconditions for a rate hike. He said ”sustained growth above its past average of around 0.6% per quarter” is one of three factors that are “worthy of particular attention in informing the timing, pace and degree of likely Bank Rate increases”. The other two are that “domestic costs need to continue to firm” and a rise in core inflation.
- There have been at least two other significant developments in the last month that will, alongside the pickup in wage growth, impact the BoE’s all-important inflation forecast. The first is that oil prices have fallen back, and the second is that trade-weighted GBP has further appreciated. In our view, the balance of these forces will result in a slight downward revision to near-term inflation and, crucially, a shift to the upside of the risks to the policy-relevant medium-term inflation forecast. In other words, we expect that on balance the MPC will see stronger wage growth as the more important influence on the policy-relevant medium-term inflation forecast, more than offsetting the impact of further sterling appreciation.
- We continue to expect the first 25 bp hike in December, a few months earlier than financial markets expect.
- Re-pricing of market expectations for a rate hike should support the GBP in the coming weeks. That is why we are looking to get short on the EUR/GBP and get long on the GBP/JPY.
AUD: RBA Meeting Scheduled For Thursday
- We expect that the RBA will not change rates at its meeting on Tuesday. We also anticipate a broadly unchanged accompanying statement. Although the AUD has declined since the last meeting on July 7, we think this will not be enough for the RBA to refrain from its statement that “the AUD has declined noticeably against the USD over the past year, though less o against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.” And given latest news suggesting slower growth in Chinese economy, the RBA should have a particular interest in further weakening the AUD to support exports.
- Moreover, a strong US non-farm payroll data on Friday are likely to add to pressure on the AUD/USD. That is why our strategy is to stay AUD/USD short this week.