Back to main menu
Search
Search
Overlay

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. 

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

Related articles

scroll to top