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Financial Mirror (Cyprus) - - FRONT PAGE -

There’s gen­er­ally a cor­re­la­tion in the cur­rency mar­kets where any bounce in the price of WTI in­spires sim­i­lar mo­men­tum in those cur­ren­cies linked to com­mod­ity prices. How­ever, this hasn’t been the case on this oc­ca­sion with this prob­a­bly linked to ris­ing sus­pi­cions that the OPEC meet­ing later this week will leave oil pro­duc­tion lev­els un­changed. Although there are con­cerns over how economies will be able to cope with the dra­matic decline in the price of WTI over the pre­vi­ous year, the re­cent re­ports show­ing that pro­duc­tion lev­els are still ris­ing from OPEC com­mit­tee mem­bers sug­gests that the lower oil prices are set to stay. Due to the like­li­hood that OPEC will leave pro­duc­tion lev­els un­changed and the prob­a­bil­ity that this will pres­sure the price of WTI, there is hes­i­ta­tion from buy­ers to buy cur­ren­cies linked to com­mod­ity prices.

With in­vest­ment in oil pro­duc­tion ris­ing de­spite the dramatically lower prices, one has to con­sider that OPEC is de­lib­er­ately try­ing to re­gain mar­ket share by keep­ing the price of WTI low and con­se­quently squeez­ing out US pro­duc­ers. Bear­ing in mind that we are now en­coun­ter­ing a re­la­tion­ship be­tween the drop in US oil rigs noted at the be­gin­ning of the year and the re­cent re­duced trade sur­pluses com­ing out of the weekly US in­ven­tory re­ports, there is room to sug­gest that this method is be­gin­ning to work. In­vest­ment in oil pro­duc­tion is in­creas­ing through­out the Mid­dle East, with this sug­gest­ing the over­sup­ply con­cerns are go­ing to re­main a dom­i­nant threat to in­vestor sen­ti­ment. What does this mean to the price of WTI and those cur­ren­cies linked to com­mod­ity prices? Con­tin­ued pres­sure, es­pe­cially with the USD re­gain­ing mo­men­tum.

The USD has re­gained its stance as the king of the cur­rency mar­kets, with this be­ing mo­ti­vated by a com­bi­na­tion of Janet Yellen re­peat­ing her com­mit­ment to raise in­ter­est rates at some point this year and re­cent US eco­nomic data sup­port­ing the Fed­eral Re­serve’s view that any decline in eco­nomic mo­men­tum was just tem­po­rary. The USD will re­main sup­ported as long as op­ti­mism re­mains that the Fed will raise rates in 2015. What has hap­pened re­cently is that fragili­ties in the US econ­omy have been ex­posed, which pro­vides val­i­da­tion for the Fed to main­tain a cau­tious and hes­i­tance stance to­wards rais­ing in­ter­est rates. As I have com­mented since the end of Septem­ber 2014, I still ex­pect the first US in­ter­est rate rise to take place in Septem­ber 2015.

We saw the need for ad­di­tional im­prove­ments in the US econ­omy out­lined once again when con­sumer spend­ing re­mained un­changed in April de­spite per­sonal in­comes ris­ing above ex­pec­ta­tions. The re­peated signs of con­tin­ued weak­ness in con­sumer spend­ing within the US econ­omy is not go­ing to pre­vent the Fed from rais­ing in­ter­est rates at some point later this year, but it will slow down the pace of fu­ture rate rises. It just re­it­er­ates that there are still fragili­ties in the US econ­omy that have been ex­posed, with the lack of con­sumer spend­ing be­ing a ma­jor con­cern. It is a ma­jor con­cern not just be­cause con­sumer spend­ing rep­re­sents such a huge pro­por­tion of GDP, but also be­cause a lack of spend­ing will also weigh on in­fla­tion prospects with this be­ing some­thing the Fed vig­or­ously mon­i­tors.

Any hopes of a fur­ther bounce in EURUSD ended swiftly fol­low­ing the pair’s fail­ure to close above 1.10 at the end of last week. This was largely seen as a psy­cho­log­i­cal re­sis­tance level and the fail­ure to close above 1.10 al­lowed the bears to take con­trol with the EURUSD drop­ping by 100 pips to 1.0890. Greece is once again be­ing seen as the re­oc­cur­ring risk to in­vestor sen­ti­ment, with the mar­kets hav­ing to hear fur­ther con­trast­ing re­ports over whether an agree­ment with its cred­i­tors is im­mi­nent. We are only days away from the next Greece re­pay­ment with the ma­jor threat re­main­ing that a de­fault by Athens is still a pos­si­bil­ity. This hasn’t been fac­tored into the cur­rency and the Euro is still vul­ner­a­ble to fur­ther de­clines. Even if there isn’t a de­fault, the like­li­hood of cap­i­tal con­trols within Greece is ris­ing.

It was re­peat­edly pointed out that if the GBPUSD man­aged to close be­low 1.55, the bears would see an op­por­tu­nity to ex­ploit weak­ness in the pair and we have now dropped to 1.5181. Although eco­nomic data showed an im­prove­ment in man­u­fac­tur­ing ac­tiv­ity over the pre­vi­ous month, the PMI missed ex­pec­ta­tions with this com­ing on the back of in­vestor sen­ti­ment be­ing weak­ened by the news that the UK’s main GDP con­trib­u­tor, ser­vices, ex­panded at its weak­est pace in over two years in the first quar­ter of 2015. With it be­ing in­evitable that the Bank of Eng­land will leave in­ter­est rates un­changed later this week, it re­mains pos­si­ble that the GBPUSD is go­ing to re­turn to the May lows of 1.50.

Mar­kets Re­port b

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