Headlines
UK trade balance improves to best in 2 yrs –
Pound rises on shrinking deficit.
Lenders demand further austerity in Greece –
‘Temporary Grexit’ on the cards if they decline.
GBP/USD rises through resistance –
Fed’s Yellen suggests higher rates in 2015.
GBP/CAD hits 6-yr high –
GBP/AUD strikes new 6-yr high.
Sterling
The Pound performed well on Friday thanks to some better-than-anticipated UK terms of trade figures. The latest report from the Office for National Statistics (ONS) showed that Britain’s trade deficit with the rest of the world shrunk to its lowest for almost two years in May. The UK has long suffered from a negative trade balance due to imports consistently outweighing exports, however, the shortfall shrunk from -£1.83 billion to -£393 million during May, which brought the balance to its best level since June 2013.
The improvement boosted the appeal of the Pound but long-term traders remained sceptical because the deficit shrinkage was largely driven by a fall in exports. Indeed, exports are predicted to rise from £500 billion to £630 billion by 2020, which is still a long way off PM David Cameron and Chancellor George Osborne’s target of £1 trillion.
Euro
Heated negotiations between Greece and its creditors continued over the weekend and led to a 50-pip gain for the Pound over the Euro.
Although the Hellenic nation practically surrendered to the institutions’ former demands last week, further austerity measures were put forward over the weekend. Euro politicians, led by German Chancellor Angela Merkel, demanded that Greece immediately push through seven new economic reforms, including: streamlining VAT, broadening the tax bases and implementing a series of automatic spending cuts. Without imposing these measures Greece would be unable to secure a third bailout package worth around €86 billion.
German officials suggested that if Greek PM Alexis Tsipras did not accept the new proposals then Greece could be pushed out of the Eurozone for five years, in what has been described as a ‘temporary Grexit’.
Greek officials described the offer as ‘humiliating and disastrous’ and said that the talks had descended into ‘extensive mental waterboarding’.
Holders of the single currency are unlikely to be thrilled with the prospect of a trial separation, as data shows that most marriages never recover, and subsequently the Euro could depreciate over the week if the Greek government rejects the new plan. Alternatively, a formal agreement between Greece and its creditors could pave the way for a rebound in the single currency.
US Dollar
The Pound to US Dollar exchange rate rallied by around 120 pips on Friday as traders drove Sterling higher following the encouraging UK trade balance report.
GBP/USD settled above a key psychological resistance level at the end of last week’s session as speculative investors mulled over the prospects of a rise in rates in the US. Janet Yellen, the head of the world’s most powerful central bank, announced that the Federal Reserve was on track to start hiking interest rates at some point in 2015. The central banker said that small and steady rises in borrowing costs would not have a negative impact on the US, or indeed the global, economic recovery.
Some analysts expect the Fed to start raising rates as early as September, but with financial markets rattled by the prospect of a ‘Grexit’, it looks more likely that policymakers will wait until December, or perhaps later, to start the hiking cycle.
Canadian Dollar
Sterling increased in value against the Canadian Dollar by around 120 pips to a new six-year high on Friday as markets reacted to the upbeat UK trade figures and a slight deterioration in the Canadian labour market.
The headline unemployment rate remained at 6.8%, beating estimates of a rise to 6.9%, but traders were disappointed with a -6,400 decrease in employment as employers cut back on private sector positions.
As a commodity-correlated currency the ‘Loonie’ remains susceptible to shifts in risk sentiment and subsequently the Canadian Dollar, which is currently trading at a six-year low, could weaken further if Greek negotiations sour over the next few days.
Australian Dollar
The Pound to Australian Dollar exchange rate is standing close to a six-year high at the start of this week’s session. Sterling rallied by around 300 pips on Friday as Greek concerns mixed with positive UK economic sentiment boosted GBP/AUD. And the British Pound managed to extend its gains during the Asian session as jittery traders cut short their ‘Aussie’ Dollar positions in reaction to the possibility of Greek leaders rejecting the Eurogroup’s latest raft of draconian austerity measures.
New Zealand Dollar
The Pound strengthened by over three cents against the New Zealand Dollar over the weekend. The rationale behind the GBP/NZD moves was very similar to the motivation behind the appreciation in GBP/AUD: decent British trade numbers and uncertainty over Greece’s future in the currency bloc. The ‘Kiwi’ Dollar lived up to its billing as a risk-sensitive currency and depreciated sharply as economic uncertainty spread throughout the marketplace.
Data Released Today
19:00 USD Monthly Budget Statement (JUN) Medium -$40.5B