British Pound Storms Ahead Against AUD, NZD, CAD but Mixed Against Euro, Lower vs Dollar

Above: ECB Vice President Vítor Constâncio. Source: European Central Bank

Pound sterling is on the offensive at the start of the new week against most major rivals, save the US dollar.

• The dollar's May recovery extends ensuring GBP/USD exchange rate has declined for the past 6 days
• Euro should be higher thanks to German industrial data and words from the Vice President of the ECB
• Commodity bloc currencies coming under notable pressure as markets realise that recent gains may have offered a false start on a long hoped-for recovery

The dollar’s recovery from its poor run of form over recent months continues to be the driving force on foreign exchange markets which have given little thought to the previous Friday’s release of below-par employment data.

The dollar's rally comes as markets realise the case for a June interest rate rise at the US Federal Reserve could in fact be stronger than they had initially expected. To reflect this they are buying up dollars and pushing US interest rate yields higher.

The dollar's continued strength has ensured the pound remains in the passenger seat and has fallen for 6 days in a row confirming a shift in momentum and the realisation that the upper limit's to the the recent recovery may have been seen.

However, the GBP is firm elsewhere and has registered further advances against the Canadian, Australian and New Zealand dollars.

The commodity currency sector is coming under pressure once more thanks to developments in China where Trade Balance data proved to be unquestionably negative.

The Chinese Trade surplus came in at 45.6B vs. 40.5B forecast by analysts however what should be a good headline was undermined by the details.

The only reason the surplus impressed was due to a notable sharp drop in imports which were down -10.9% in April.

Overall in the January to April period imports are down -12.8% on a year over year basis confirming demand for output from countries like New Zealand, Australia and South Africa remains tepid.

Their currencies are responding in a predictably negative fashion.

The Australian dollar came under further pressure from news that its number one export -  iron ore - was in heavy surplus on Chinese markets.

Iron ore prices continued to fall as inventories in Chinese ports hit the highest in more than a year.

Stockpiles climbed 1.4% to 99.9mt last week marking the highest reading since Mar/15.

This takes the annual increase to 7.3%.

Qingdao port delivered 62% Fe iron ore is quoted at US$58.3/t, according to Metal Bulletin data.

Futures trading on the Dalian Exchange traded at CNY 403.5/t (US$62.0/t), down from CNY 412.5/t on Friday and CNY 479/t on 25 Apr/16.

And it gets worse. Copper prices are down 1.7%c on the back of poor Chinese economic data and strengthening US$.

Shipments of unwrought copper and products fell to 450kt in April, down from 570kt in Mar, Chinese customs reported on Sunday.

However, as we note here, the Australian dollar is now oversold and the chance for a short-term recovery is growing.

Latest Pound/Euro Exchange Rates

	Live: 1.145▲ + 0.06% 12 Month Best: 1.2162
*Your Bank's Retail Rate	1.1061 - 1.1107
**Independent Specialist	1.129 - 1.1336 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Euro Exchange Rates Subdued Despite All the Good News

The euro should be higher but continues to deliver an underwhelming performance despite some undoubtedly strong economic figures coming out of Germany at the start of the new week.

German factory orders smashed median expectations in March with orders increasing 1.9% in the month.

This should provide a positive tailwind for the comparative Eurozone data, due on Thursday.

“The aggressive acceleration in factory output favours a continued uptrend in the Eurozone economic surprise index (ESI). Although the series currently remains in negative territory it has moved aggressively higher since registering a near three year low at the end of February,” says analyst Jeremy Stretch at CIBC Markets in London.

The uptrend in the ESI is contingent with the continued reduction in EUR speculative shorts - a sign that markets are turning more positive on the euro’s prospects going forward.

Investors have pared negative EUR positions for seven straight weeks, reducing positions to the lowest level in almost two years.

Aiding positive sentiment towards the euro are European Central Bank sources who have suggested that the Bank are not in a rush to consider additional policies, even as CPI remains well below target.

Such assumptions have been given further credence by the ECB's Vice President Constancio who used a speech in London to remind the market to give the central bank time to allow their measures to take effect.

Nevertheless, markets are struggling to push the shared currency notably higher.

“In the short term even in the context of the positive data surprise we would expect EUR USD impetus to wane on any rallies towards 1.1430/40,” says Stretch.

And here is the problem - despite the strong data the market just won’t take the EUR/USD above long-term resistance at 1.1450 ensuring the entire complex is skewed to see strength fade.

As such the pound has been able to sneak in advances against the shared currency following the heavy selling that has so far characterised GBP/EUR this May.  

UK Referendum Posing Awkward Questions for the Euro Long-Term

Another point to ponder on the euro concerns the UK’s EU referendum.

Typically discussion on the subject involves the pound but new polling data suggests the uncertainty surrounding the vote is now starting to affect the euro as well.

“Many Europeans fear that a UK exit from EU would open up the prospect of other member nations leaving the union which could unravel the whole EZ experiment,” says Boris Schlossberg at BK Asset Management in New York.

Schlossberg’s comments relate to a poll showing nearly half the Europeans think that other member nations would leave if UK pulled out and approximately the same number believe that UK will ultimately vote to leave on June 23rd.

“The Brexit campaign may have sparked a revolution in opinion amongst the broader European populace with now 50% of the EZ citizens expressing the desire for a referendum in the issue in their own countries,” says Schlossberg.

The latest voter intention polls show that the Leave vote and Remain vote are still in a virtual tie with about 20% of the population still undecided.

Odds markets continue to show Remain has the advantage, and only when odds move notable towards Leave would we expect the British pound to also move.