By Lauren Buckner
Last week’s market movement was dominated by the US Dollar and a lack of meaningful data from the UK and Europe. US Dollar strength had been driven by both risk sentiment (nerves about fx rates’ next move) and some robust data from the States showing a revival in economic performance. With a bounce in oil prices suggesting risk appetite increasing and better than expected sentiment from businesses across the Atlantic with dropping unemployment claims, the US economy appears to be more robust than previously expected and the US Dollar softened slightly during the Asian trading session overnight.
This allowed the US Dollar to dominate both the Euro and the Pound last week and exchange rates on both currencies weakened to three month lows versus the greenback. In turn this held GBP/EUR in its now entrenched trading range which seems to be narrowing even further, for now.
For our clients trading GBP/EUR the narrow market range could suggest that a dramatic break out is to be becoming more likely and trading risks are increasing. Having sat in the same two cent range for over three months now it becomes more likely that once a move occurs it will be exaggerated by profit taking as traders rush to capitalise on some much needed volatility for their profit margins. This increases the impact that this week’s European Central Bank (ECB) could hold.
With interest rates dominating exchange rate movements for the past 21 months, and interest rate rises meaning a stronger currency in general, the ECB are up first on Thursday to announce their interest rate decision this week – followed by the Federal Reserve for the US and the Bank of England next week. This gives the Euro the opportunity to dictate the next move in currency rates first.
As always there is debate about the outcome for Thursday’s meeting which in itself is a huge balancing act for the EU. Recent data has seen a downgrade in growth for the last quarter from 0.3 to 0.1pc, weak business sentiment from August and a fall in industrial production in Germany – the EU’s economic powerhouse so an interest rate rise this week could be a step too soon but high inflation continues to be problematic for consumers; the central bank’s main concern. Currently predictions stand at around a 35pc chance of an interest rate rise in Europe from 3.75 to 4pc which should prompt euro strength but the ever increasing risk of stagflation (high inflation but slow economic growth) is becoming a real issue for Europe and a further interest rate rise could be damaging. With such a difficult balancing act ahead this is going to prompt real focus on the announcement and accompanying press conference.
This increased challenge in balancing economic growth with inflation increases uncertainty over the ECB’s upcoming decision means that there is no obvious outcome for Thursday’s meeting. This in turn heightens the risk of an exaggerated fx move, especially as we look further forward to the US and UK interest rate decisions which follow next week plus a flurry of economic data out from both the US and the UK this week which could impact the odds on interest rate changes (or not) and cause even further currency volatility. Clients with an upcoming currency requirement can get in touch to make the team aware and discuss the options available to mitigate your risk of exchange rates moving and costing you more money than the current levels.
This week’s data releases:
Tuesday
UK – average earnings
UK – claimant count
UK – Unemployment rate
EU – ZEW economic sentiment survey
Wednesday
UK – GDP – July
UK – Industrial Production
UK – Manufacturing production
EU – Industrial Production
US – Consumer Price Index
Thursday
EU – ECB MONETARY POLICY DECISION
EU – ECB Press conference
US – Producer Price Index
US – Initial Jobless Claims
US – Retail Sales
Friday
EU – Trade balance
UK – Consumer Inflation expectations
US – Industrial Production
US – Michigan Consumer sentiment index
US – Industrial Production