It was a tricky week for foreign exchange markets as the Swiss franc continued to focus on geopolitical tensions, creating safe haven flows into the currency. Broader market sentiment was fairly upbeat given the PMI surveys that were released this week showing Chinese manufacturing sector expanding for the first time in six-months. Focus was also centred on US economic data that contrasted with a level-headed European Central Bank. The euro started the week out strong, but then gave up those gains headed into the ECB’s policy meeting, as investors anticipated a dovish sounding committee. The sterling continued to outpace all other currencies, with gains coming on the back of strong economic data than continued to beat market expectations.
Euro
The euro was little impacted by weak economic data that was seen at the beginning of the week. German retail sales weakened, while inflation figures held steady. In the eurozone, PMI surveys continued to reveal a weak outlook for Q2 growth and diverging strength between eurozone economies. Private sector loan growth remained starkly in negative territory, but markets were able to shrug off all the weak data knowing that the actions taken at the June ECB policy meeting would take time to work their way into the real economy and economic data. As expected the ECB decided to leave its monetary policy unchanged despite calls for additional action by the French Prime Minister who said that the euro remained overvalued.
Sterling
The sterling looked as if it was headed to the moon jumping to fresh six-year highs against the US dollar and moving towards 21-month highs against the euro. The currency was supported by the better-than-expected economic data that was released this week in the UK, which brought forward interest rate expectations, despite some comments from central bankers. Moody’s rating agency said that debt levels are likely to become less affordable, which only backed up market speculation over an increase chance to rate hikes. A Nationwide house price survey moved to levels not seen in nine years, while manufacturing and construction PMI survey beat market forecasts.
US dollar
The week was cut short by the US Independence Day holiday yesterday. The data that is normally released on Friday was brought forward to Thursday creating a flurry of activity given the coinciding ECB policy meeting. The ADP employment report provided encouraging signs going into the figures with a gain of 281,000 new jobs. The data helped pull the dollar index back off seven-week lows when coupled with figures that also showed an improving housing market. Pending home sales rose to an eight-month high. The jobs and housing sectors of the US economy have been the most troubling for the central bank and improvements seen this week are likely to continue to support the longer term outlook for the US dollar.