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Weekly Review July 3


Date of publication: July 3, 2017 | Author: Tim Clayton

There was little in the way of evidence on the US outlook during the week with most attention on European central banks. The weekly events reinforced the crucial factor that exchange rates are driven by relative changes in economic fundamentals and expectations surrounding interest rates.

There were no major negative US or dollar developments during the week, but the US currency lost ground due to increased buying of other major currencies.

US

There was an upward revision to US first-quarter GDP growth to 1.4% from 1.2% which had little overall impact while durable goods orders declined 1.1% on the month. Consumer confidence held strong and there was a strong reading for the Chicago PMI index

There were also significant comments from Fed Chair Yellen in her London discussion. Although there was no major change in sentiment surrounding the US outlook, the dollar weakened due to increased confidence surrounding developments in other major currencies, especially the Euro.

The dollar index declined sharply on the week with the lowest reading for 8 months and the second-quarter performance was the worst for close to seven years.  

UK

The final UK first-quarter GDP growth reading was unchanged at 0.2%, but a further decline in real incomes and a drop in the savings rate reinforced concerns over the outlook for consumer spending.

Comments from Bank of England officials were the main focus during the week as the central bank forced commercial banks to tighten credit standards. Governor Carney stated that the case for higher interest rates would need to be debated in the months ahead and rates would need to be raised as spare capacity in the economy was eroded.

Chief Economist Haldane also expected that interest rates would need to be increased if forthcoming data was favourable.

These Bank of England comments were important in increasing expectations that the Monetary Policy Committee (MPC) would move towards raising interest rates during the second half of 2017. The comments provided notable Sterling support against the dollar with a GBP/USD move to just above 1.3000 for the first time in six weeks, although there was little change against the Euro.

Euro-zone

There was an increase in the German inflation rate to 1.6% on the month from 1.5% previously, maintaining pressure for higher interest rates. The German index of business confidence also strengthened to a record high, although unemployment edged slightly higher for the first time in close to two years.

Comments from ECB President Draghi were the main focus during the week. In a long speech, Draghi’s main message was increased confidence in the economic outlook and that the bank would be able to lessen the amount of monetary stimulus in the economy even with inflation remaining at low levels.

There were strong hints that the ECB would move to adjust policy during the second half of 2017 and these comments were crucial in boosting the Euro. Expectations of a change in monetary policy provided strong Euro support with EUR/USD strengthening to a 14-month high against the dollar.

International

Oil prices recovered further ground during the week with support from a weaker dollar as Brent rallied to the $49.00 p/b area.

Confidence in the global outlook boosted support for commodity prices which supported the Australian and Canadian dollars.

The Bank of Canada was more optimistic surrounding the outlook which also provided net support for the Canadian dollar with USD/CAD hitting 2017 lows below 1.3000.

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 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 Investing.com and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics. 

 

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