Round up for the week 19/05/14 – 23/05/14

The UK economy is showing signs of strong growth however, the soaring house prices continues to be an issue, one which the Bank of England believes could hamper the recovery of the economy.  Demand for housing has been fuelled by the government schemes that help home buyers particularly first-time buyers, and low interest mortgages due to the low interest rates set by the Bank of England.  The supply of new housing is low compared to the demand being created, according to some economist there needs to be twice the amount of homes built each year than what is currently being built.

In the past year the pace of with the UK economy has recovered has surpassed expectations, this is shown in the rising strength of the pound over the past year.  The BoE doesn’t want to sabotage the recovery by raising interest rates too rapidly or by too much at once, instead they first may scale back on the quantitative easing programme before deciding to increase interest rates, I believe investors shouldn’t expect interest rates to rise until next year.

The GBP had a positive week with a slight down turn near the end of the week against the Dollar, the core CPI report beat expectation and the Bank of England minutes had indications that interest rates could be raised in the future.  Therefore I believe the GBP still has a bullish outlook for next week, we may even get another test at the 1.70 level on the GBP/USD.

News reports to look out for that may affect the GBP next week – Nationwide house prices, released on Monday 26th May. Currently this figure shows UK house prices have increased in value on average by 10.9% in the past year, don’t be surprised if this figure increases slightly on Monday.

This week the USD/JPY has been trading near the 100.75 support level and on Wednesday 21st price touched the 100.75 level before retracing upwards, one reason behind the testing of the 100.75 support level due to a slightly hawkish press conference by Mr Kuroda the Governor of the Bank of Japan.  Mr Kuroda made it clear that the BoJ will not be considering anymore quantitative easing because they are almost at their target of 2% for inflation.  His words were “Our quantitative easing policy is exerting its intended effect. The Bank of Japan will continue with this policy until the 2 percent target is achieved in a sustained manner.”  The BoJ believes the economy can endure the VAT increase without the need of further quantitative easing.

My opinion on the Yen is that it seems to be slightly stronger than the EUR but weaker against the GBP and USD, but at the moment it’s difficult to call. I will be looking for a possible break or bounce on key support levels next week on the USD/JPY and EUR/JPY.

News reports to look out for that may affect the Yen next week – Retail Trade released Thursday, Jobless Rate and CPI excluding fresh food.  The results of these reports may give a stronger clue on how strong the Yen is compared to some of the other currencies.

The US Federal Reserve has left rates the same so the release of the April 29-30th meeting minutes  could give investors an indication on what to expect in the near future for the dollar.  From the report there doesn’t seem to be any signs of increased rates happening any time soon, but the Fed members did decide that early planning of the next stages is required after the economy improves.  Here is an extract from the minutes

“When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The Dollar has had some positive and some negatives, my opinion is neutral regarding the Dollar, against the GBP I believe the value will fall, but against the Euro I feel it will rise further.  I will be keeping a watchful eye on the Dollar Index as the price is trading near the 80.20 level, depending on how well the Dollar does next week I think we could see either a break or a bounce at this level.

News reports to look out for concerning the USD – the GDP report being released on Thursday.

The Euro has been outperformed by almost all the major currencies in another torrid week, and I believe it will continue into next week, there has been poor data coming out of Europe and this may prompt the ECB to cut rates sooner rather than later.

This week has also seen the European Parliament elections for 2014, UKIP and Labour won more seats and Conservatives and Liberal Democrats lost seats.  Though the results will not have a direct effect on the Euro exchange rates, the popularity of right-winged political groups emerging across Europe is an interesting phenomenon. Watch this Space.

News reports to look out for that may affect the Euro next week – German retail sales and unemployment rate released on Tuesday and Wednesday respectively, and the Italian CPI released on Friday.

Pi De Jonge

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