Market news

3 May 2016

American focus: the US dollar significantly higher against most major currencies

The British pound dropped significantly against the dollar, reaching a minimum of 28 April, which was caused by the publication of weak data on the UK and increased demand for the US currency ahead of the release of statistics on the labor market. In addition, some investors opted to take profits after the rise of the pair to a new 3-month high. As it became known, the business activity index of the manufacturing sector by Markit UK in April fell to 49.2 from 50.7 the previous value. Analysts had expected the index to rise to 51.2. Thus, the figure fell below the neutral value of 50 for the first time since March of 2013. The most significant decrease in activity is observed in the segment of consumer and investment goods. Investors are more likely to decide not to spend money in anticipation of the June referendum on Britain's membership of the European Union. New export orders fell amid slowing global growth.

Later this week, investors will be watching UK data on business activity in the construction sector and the service sector. That the PMI index is expected for the construction sector fell to 54.0 from 54.2, while the PMI index for the services sector fell to 53.6 from 53.7.

The euro fell significantly against the US dollar, having lost all previously-earned positions today. Experts point out that market participants are beginning to take profits on short positions on the US currency ahead of the release of Friday's employment report, which in recent years has been supporting the dollar.

Moderate pressure on the euro also provided updated projections by the European Commission. Currently, the European Commission expects the euro area GDP growth in 2016 will be around 1.6% against the previous forecast of 1.7% and EU GDP growth of 1.8% against the previous forecast of 1.9%. The growth of the EU's GDP in 2017 will be at 1.9% against the previous forecast of 2.0%. Inflation in the euro area in 2016 is projected to be 0.2% against the previous forecast of 0.5%. In 2017, inflation is expected to rise by 1.4% against the previous forecast of 1.5%. It is also expected in the European Commission, that unemployment in the eurozone in 2016 was 10.3% against the previous forecast of 10.5%. In 2017, unemployment is expected to reach 9.9% against the previous forecast of 10.2%. Eurozone budget deficit in 2016 is expected to reach 1.9% of GDP, and in 2017 at 1.6% of GDP. The European Commission believes that growth in the euro zone economy may put pressure slowing growth in China and in other developing countries, as well as the uncertainty associated with possible withdrawal of Great Britain from the EU.

The Australian dollar has fallen 2.3 percent against the US dollar, its lowest level since March 24. The negative impact of the currency have had the results of the meeting of the RBA, as well as the annual budget presented today. Additional pressure has had a widespread strengthening of the American currency. Recall, the Reserve Bank of Australia for the first time decided to lower the interest rate by 0.25% to a new record low of 1.75% this year. Most economists are not waiting for such decisive action. Central Bank lowered the rate trying to overcome the low inflation rate and become strong Australian currency. In general, according to the Central Bank, economic growth continues and is stable, but it is still lower compared to 2015. In addition, the increasing rate of the national currency could hamper economic recovery. Another reason for the rate cut was the situation in the labor market. The Central Bank said the recent labor market indicators have been sending mixed signals, but a very moderate growth in labor costs contribute to lower inflation forecasts.

As regards the annual budget, the Australian government announced that the budget deficit forecast at 39.9 billion in 2015-16 and fingodu 37.1 billion. Fingodu in 2016-17. Meanwhile, the government has lowered the forecast for GDP growth in 2016-17 fingodu to 2.5% from 2.75%. In addition, it became known that the government forecasts inflation of consumer prices in 2016-17 at the level of 2%. The government also lowered the forecast of unemployment in mid-2017 to 5.5% from 6.0%

Market Focus
  • ECB's Weidmann says first ECB rate hike could follow the end of QE more closely than in the U.S
  • Industrial producer prices rose by 0.1% in the euro area (EA19) and by 0.2% in the EU28
  • European Commission forecasts Euro Zone inflation will accelerate to 1.6 pct y/y in 2019 from 1.5 pct y/y seen in 2018
  • UK service providers signalled a modest rebound in business activity - Markit

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