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Jameel Ahmad, Chief Market Analyst at ForexTime (FXTM) explores geopolitical factors which are continuing to blight Europe’s flagging economy.
May has been quite an eventful month for the foreign currency markets with the major currencies jockeying for position amidst a flurry of expected and unexpected announcements. From the surprisingly clear outcome of the UK general election, to the positive EU data getting muddled with concerns over the Greek debt, the inconsistency of US data, and the tumbling fate of the Japanese Yen, May really kept investors on their toes, affording both the bears and the bulls moments of excitement and action.
The EURUSD began the month rather quietly with the US dollar showing signs of recovering momentum after the pressure it had received during the last week of April in anticipation of the FOMC statement. However, the uncertainty over the UK general election increased buying of the EURGBP pair, which also raised the value of the EURUSD to 1.1370 by 7th May.
With the UK general election over, a positive NFP report from the US and increased fears over the failed European talks regarding Greece’s debt reversed the direction of the pair for the rest of the week pushing the euro down against the greenback.
The following week brought positive European data (barring Greece) that began favoring the euro, while a statement by Bill Dudley (Federal Reserve New York Chief) that he was unsure when the Federal Reserve would hike interest rates helped to further strengthen the building momentum for the euro.
After hitting its monthly high of 1.1446 on 15th May and flat-lining for a few days in the 1.14 region, the EURUSD began to sharply decline in the second half of the month, experiencing a steep fall on the 19th on account of the news that Greece had used emergency reserves to pay the IMF.
When Greece warned on the 22nd of the month that it would be unable to meet its next debt payment at the end of May, the EURUSD pair tumbled even more, falling below 1.10 and remaining there through the end of the month.
After hitting a deep low against the US dollar in April, the British pound fared surprisingly well throughout May. Despite a slow start, the GBPUSD began charging upwards on 7th May when the results of the UK general election proved to be nowhere as close as polls had shown.
With the Conservatives winning a majority and the possibility of a hung parliament eliminated, investors turned to the pound with replenished confidence. After the announcement regarding US interest rates by Fed’s Bill Dudley on the 12th of the month dampened expectations that the Federal Reserve would be raising interest rates in the near future, and in combination with news of Greece’s relapse into recession on 13th May, the GBP rallied even higher against its major competitors around the middle of May.
Despite the dovish views of Bank of England (BoE) Governor Mark Carney regarding inflation—which somewhat slowed down the pound’s rally—the GBPUSD pair rose to its monthly high of 1.5803 on 14th May. Nevertheless, the news on 19th May that UK inflation had turned negative (-0.1 percent) for the first time in April erased any gains the pound had made in the previous week.
On 21st May, however, UK retail sales were announced much higher than anticipated, and the GBP rallied once more against its major competitors. Continuing concerns over UK inflation levels and a leaked email revealing that that the BoE is investigating potential risks to the country’s economy should the UK leave the EU, weighed heavily on investor sentiment and sent the GBPUSD pair down below the 1.54 level, where it stayed for the rest of the month.
With all the contradicting news coming out of both the US and Europe throughout the first half of May, the Japanese yen managed to retain relative stability against the US dollar with the USDJPY pair fluctuating somewhat between the 118.5 and 120.0 levels.
After positive data from the US, and negative news from the EU and the UK towards the end of the month sent the dollar soaring, the Japanese yen quickly began losing its footing against the greenback. Despite official Japanese data that showed a second consecutive quarter of growth, on 26th May the USDJPY pair broke above 123 yen, a level it hadn’t reached since July 2007 and inched towards 124 yen by the month’s close.
This is a Guest Editorial which was compiled by and represents the views of Jameel Ahmad, Chief Market Analyst at ForexTime (FXTM)