No more supportive UK data on the horizon but why isn’t the GBP benefiting from improving risk appetite?

The pound has been struggling of late, despite some improvements in the UK data. The most recent data improvements have seen the retail sector record a recovery, consumer confidence rise to a 17-month high, and a surprise rise in house prices in June. That said, activity surveys have generally been weaker, the UK current account deficit has widened sharply, and money supply growth is zero.

Meanwhile in the asset markets, there have been signs of an improvement in risk appetite, but this hasn’t been associated with a rally in the pound, at least not against the US dollar or euro. Is the GBP reaching levels that carry with them greater resistance, or is this simply a pause in recent trends before an effort is made to push higher once again? The UK data and surveys due this week are unlikely to offer the GBP support, given that there are few notable releases from the UK. 

The big data releases this week come from the US, and to a lesser extent Euroland. The key critical release is the US employment report for June, and within that the non-farm payrolls data. 

The US labour market has exhibited surprising strength in the face of more challenging economic conditions, albeit this strength hasn’t prompted any surge in average earnings growth. The June outturn is likely to record more of the same, with employment gains still strong, but earnings still becalmed. That could offer the US dollar some support, although the markets already price-in a high probability of a Fed interest rate hike at the end of July. 

In Euroland the focus is likely to be on industrial production figures for May. Could we see another reduction in output, and if so, what will that do to the euro’s value relative to that of the pound and US dollar? 

USD showing signs of strength in Asia, but struggling against the GBP and EUR

Recent trends in FX markets have been interesting. The US dollar has made headway against the Japanese yen and Chinese renminbi, but made losses against the euro and pound. During June alone, the US dollar lost around 1.4% of its value versus the pound and euro, but gained over 3.8% versus the yen and over 2.1% versus the renminbi. It has also gained over 1.8% against the Thai baht, over 9% versus the Russian rouble and 20% against the Turkish lira. 

It's not very unlikely to see trends such as this happening, but the opposing moves are further complicated by the improvement in risk appetite. Is there more weakness to come for Asian currencies against the US dollar and will that undermine additional EUR and GBP gains?

A hike from the Reserve Bank of Australia while other central banks stand pat

This week sees the RBA (Reserve Bank of Australia) kick the central bank meetings schedule off, with markets expecting it to hike interest rates a further 25 basis points, which would take the cash target rate to its highest level since 2011. 

Meanwhile the National Bank of Malaysia and the National Bank of Poland are not expected to adjust the borrowing rates. The only question for markets is whether the RBA’s action will prompt Aussie strength or not, and I think not in this case, given it is priced for by interest rate markets and the downside risks to the Australian economy are getting larger, in my opinion. 

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