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Analysis and Prediction:

Date of publication: August 14, 2017 | Author: Tim Clayton

Last Week’s Summary

Global trends in risk appetite have dominated market moves during the week with a particular focus on North Korea as aggressive rhetoric between the US and Pyongyang regime intensified.

Greed versus fear in action

Global asset prices are always influenced strongly by the balance between greed and fear. When an asset price is rising, there is a strong temptation to buy in order to avoid missing out on further gains.

When markets turn, however, and asset prices start falling, the mentality quickly turns to fear amid concerns that any further decline will increase losses. Fear then starts to dominate and selling pressure can intensify quickly

During the week, there was aggressive rhetoric from US President Trump after reports that North Korea had the ability to miniaturise nuclear warheads to enable them to be carried on long-range missiles.

Trump stated that any attack on the US would be met with fire and fury. In response, North Korea threatened to launch missiles against the Pacific island of Guam.

The market reaction was in line classic patterns seen when global fear increases and risk appetite deteriorate.

There was sharp selling pressure on global equities with an increase in defensive assets demand for the Japanese yen and Swiss franc while gold prices also rose strongly.


There was a very strong reading for US job openings in the latest data for June, but there was a slightly weaker than expected reading for producer prices.

The main focus was on the consumer prices data and the headline reading was below consensus forecasts for the fourth successive month. Consumer prices rose 0.1% for July compared with market expectations of a 0.2% gain and the year-on-year increase was held at 1.7%. Underlying prices aso rose 0.1% on the month to give a 1.7% annual gain.

The data triggered fresh doubts surrounding the likelihood of a further increase in Federal Reserve interest rates which put the dollar under fresh selling pressure.

The US currency lost ground overall with the trade-weighted index only slightly above 2017 lows.


Headline UK industrial production data was stronger than expected with a 0.5% increase for June, although this was distorted by gains in oil and gas output.

Manufacturing data was relatively weak and the latest trade data was also worse than expected. Overall confidence in the UK outlook remained fragile which limited Sterling support.

Bank of England member Saunders, who voted for an immediate increase in interest rates to 0.50% in the last MPC, stated that fears over a very sharp decline in consumer spending had not materialised.

There was a show of unity between Chancellor Hammond and Trade Minister Fox over Brexit, but markets overall struggled to find strong reasons to buy Sterling. GBP/USD fluctuated around 1.3000 while EUR/GBP advanced to fresh 10-month highs near 0.9100.


There were few Euro-zone developments during the week with the peak holiday season an important factor limiting activity.

The Euro was undermined by profit taking at times, but EUR/USD finished the week above 1.1800.


There was further selling pressure on commodity currencies during the week, primarily due to the impact on weaker risk conditions.

The Reserve Bank of New Zealand left interest rates on hold at 1.75% following the latest policy meeting. The central bank again warned over the risks posed by a strong currency and the New Zealand dollar weakened after the statement.

The Australian and Canadian dollars declined for the week as a whole, but closed above their weakest levels.

Next Week’s Forecast & Events

Origami dollar arrow pointing down over a world mapRisk conditions will continue to have an important impact during the week with all eyes still on North Korea.  If North Korean tensions ease slightly, there will be scope for a retreat in the yen and Swiss franc while any further increase in fear would trigger further demand for these two currencies.

Investors will also need to be very aware of the fact that trading volumes will remain much lower than normal during the week due to summer holidays in the US and Europe. This lack of liquidity maintains the risk of high volatility and erratic currency moves.

There is scope for fear to ease slightly, but complacency is certainly a clear danger.


As far as US data is concerned, the main focus will be on Tuesday’s retail sales release. The data has been generally weaker than expected over the past few months and there will need to be a strong recovery to bolster underlying confidence in the outlook for consumer spending.

Minutes from July’s Federal Reserve policy meeting will be released on Wednesday. Principal attention will be on whether there are hints over September’s policy meeting. In particular, there will be a focus on the potential for a move to start shrinking the balance sheet in September.

What is the Fed’s balance sheet?

After the 2008 financial crisis, the Federal Reserve bought US government bonds in the open market in order to put downward pressure on interest rates and support the economy.

These bonds were bought by creating money and these securities are now held by the Federal Reserve. With the economy now on a stronger footing, the Fed is looking to start reducing the amount of securities that it holds. This would be a further move towards more normal market conditions.


The latest UK CPI inflation data will be the most important release of the week. The Bank of England left interest rates on hold at the August policy meeting and made no changes to the inflation forecasts. An increase in the inflation rate would increase pressure for the central bank to raise interest rates.

The latest labour-market data will be released on Wednesday with the retail sales release on Thursday.

Will there be a Sterling impact?

Markets are assuming that the Bank of England will be very cautious in raising interest rates. There will need to be very strong inflation and earnings releases to trigger a significant reassessment of sentiment and a notable Sterling recovery.

Nevertheless, investors needing to sell Euros against Sterling over the next 2-3 months should start to look for opportunities to take protection against a sharp Euro correction weaker by considering a forward contract.


The latest ECB monetary policy minutes will be released on Thursday although Euro-zone developments overall are likely to be limited with the peak holiday season still the main feature.

Attention will start to focus on very important speeches from ECB President Draghi due the following week.


The Canadian inflation data will be released on Friday along with the retail sales data which will have a significant impact on interest rate expectations and the currency, especially after the Bank of Canada increased interest rates by 0.25% to 0.75%.

Currency Forecast for Next Week

Currency pair Spot 1-week forecast 1-month forecast
EUR/USD 1.182 1.170 1.155
USD/JPY 109.2 111.0 112.0
EUR/GBP 0.909 0.910 0.885
GBP/EUR 1.101 1.099 1.130
GBP/USD 1.301 1.286 1.305
AUD/USD 0.790 0.785 0.775
USD/CAD 1.268 1.270 1.285
USD/SGD 1.362 1.365 1.372
USD/HKD 7.820 7.810 7.810
NZD/USD 0.732 0.740 0.728
GBP/JPY 142.1 141.3 146.2
GBP/AUD 1.647 1.638 1.684
GBP/NZD 1.777 1.737 1.793
GBP/SGD 1.771 1.755 1.791
GBP/HKD 10.17 10.04 10.19
GBP/CHF 1.250 1.258 1.311


 timTim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

Information expressed in this article and on as a whole does not constitute as financial advice. If you decide to make any actions based on the information you read, we shall not be held responsible.


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