The moves on currency markets last week saw the dollar lose some ground after its strong rally over the April/May period. At the same time the euro made gains, supported by hawkish ECB comments. In level terms, all of the above is reflected in EUR/USD starting this week up at $1.18, and GBP/USD changing hands above the $1.34 level
The euro action last week served to highlight that the main currency pairs remain sensitive to monetary policy news flow. Therefore, this coming week could be an important tone setter for currency markets over the summer. In terms of the Fed, a 25bps rate hike is locked in, so the focus will be on the updated rate projections. Specifically, if the Fed puts a fourth hike in for this year. The market is currently pricing in around a 40% chance of this. So if the Fed does turn more hawkish on its 2018 rate guidance, the dollar could regain some of the lost ground from last week
Meantime, for the euro, this week's ECB meeting provides two way risk. Key ECB members indicated last week that they would debate the ending of Quantitative Easing (QE) at the meeting. While an announcement may not be made on ending QE, President Draghi may give an indication that a decision will be made sooner rather than later. This in turn could provide further support to the euro. However, if the ECB refrains from any strong signaling in this regard, the euro is vulnerable to some downside.
Data-wise, there are busy schedules in the UK and US, while the Eurozone is quiet. If the raft of UK data for April/May provide further evidence that economy is picking up in Q2 after a very week Q1, then sterling may benefit. Meanwhile, a key Brexit debate in parliament poses some headline risk for the currency
Written By:
Sarah Duthie
IFX - Account Manager
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