By Jameel Ahmad, Global Head of Currency Strategy & Market Research at FXTM
Apart from the eagerly anticipated announcement from President Trump on whether the United States will pull out of the 2015 Iran nuclear deal, one of the most highly awaited events in the economic calendar this week will be the latest interest rate decision from the Bank of England (BoE). After sinking 5.5% since 17 April and the GBPUSD nose diving from around 1.44 to 1.35 during this period, it does appear that the financial markets are now heavily under-pricing the chances of an upbeat BoE statement later in the week.
The major catalyst behind the aggressive Pound selling from investors has been another reversal in stance from BoE Governor Mark Carney when it comes to his views on UK monetary policy. Carney has been known to backtrack on his monetary policy stance more than once in the past, but his latest change in tone has led to the financial markets completely dismissing any chance of a UK interest rate rise this month.
I would be aware that the Pound is looking heavily oversold heading into the BoE meeting, with investors expecting no action from the Monetary Policy Committee (MPC). Headlines from other voters within the MPC that their ambition remains to see higher UK interest rates should provide the Pound with an opportunity for a revival after a crushing couple of weeks.
Emerging markets hoping for reprieve from stronger Dollar
Signals that the stunning turnaround in fortunes for the US Dollar might pause is going to lead to optimism that the recent pain for emerging market currencies will also take a break.
The emerging market currencies have been guilty of playing catch up with the US Dollar’s strength, after the Greenback powered ahead of developed currencies like the Pound, Euro and Yen in recent weeks, with most emerging market currencies broadly lower against the USD over the past couple of days.
The unprecedented turnaround of fortunes for the US Dollar is has left a lasting impression on the FX markets. It has also been the major contributor behind the Rand giving back a significant proportion of its previous 2018 gains. While there will be concerns that the extended run of Dollar-buying momentum risks spelling pain for the emerging markets in ways not seen since the Federal Reserve began raising US interest rates back in 2015, emerging market investors should not panic. It must not be forgotten that we are encountering an unexpected global theme where the Dollar has become unexpectedly stronger than the overwhelming majority of its counterparts. The British Pound has nosedived 5.5% since April 17th, while the Euro has lost 3.7% during the same period.
Where the Dollar goes from here could depend on how the markets react to President Trump’s announcement on the Iran nuclear deal later today. President Trump has now announced that he will be informing whether the United States will pull out of the 2015 deal today, after it was previously suggested that the deadline to make a decision would be at the end of the week.
If the announcement does lead to a new round of geopolitical risk being priced into the financial markets, there will be concerns over what impact this will have on risk appetite.
There have been persistent fears for a long time that Trump will pull out of the 2015 nuclear deal and confirmation of this will present a threat to global stocks. Emerging market currencies could also feel the pinch from reduced risk appetite, while the Japanese Yen and Gold would likely benefit from market uncertainty.
Euro hits new 2018 low
The EURUSD has resumed its recent downward spiral this week, by falling below 1.19 for the first time since late 2017.
A new round of weak economic data has exposed further fears that the Euro area is at risk of entering another downturn. I personally feel that this view is a little unfair, considering that the Eurozone outperformed all expectations throughout the previous year. The latest EU data will however provide the ECB with more reason to remain hesitant on raising interest rates, meaning that increasing interest rate differentials between the United States and Europe risk exposing the EURUSD further to the downside.
Ringgit weakens ahead of General Election
Ahead of an extremely busy week for the Malaysian calendar, the Ringgit is showing signs of weakness against the USD.
The intense buying momentum in the USD has probably been the main contributor to the Ringgit fluctuations, but the general election this week will still be seen as a potential event risk. If there is unexpected uncertainty with the election in Malaysia, it can’t be ruled out that the Ringgit could find itself at risk of further selling pressure.
Rupiah weakens as Indonesia GDP disappoints
The Indonesian Rupiah tumbled to its lowest levels since December 2015 at 14,000, after GDP growth in Indonesia showed signs of weakness in the first quarter of 2018. The headline GDP miss has been attributed to weak consumption, and the news failed to help the Rupiah pull away from its recent rut that has seen the currency take the position of the second-worst Asian performer over the past three months.
The slower pace of economic growth is going to make it difficult for Bank Indonesia to raise interest rates, despite calls for the central bank to take action in an effort to prevent the local currency from further weakness.