By James Caley
Currency markets face a busy few days, with important economic announcements from the UK, Eurozone and US likely to influence exchange rates. The main focus will be Thursday’s Bank of England interest rate decision, although today’s Eurozone inflation figures could also have a significant impact on Sterling against the Euro.
The first major announcement comes this morning, when the Eurozone releases its latest inflation figures. Annual inflation is expected to rise from 3.8% to 4%, potentially increasing pressure on the European Central Bank to keep interest rates higher for longer. A stronger than expected reading could provide support for the Euro, putting some downward pressure on GBP/EUR. Conversely, inflation coming in below expectations could weaken the single currency and offer Sterling some support.
Attention then turns to the Bank of England on Thursday, with markets expecting interest rates to rise from 3.75% to 4%. If the Bank delivers the anticipated increase, the immediate impact on Sterling may be limited, as much of the move is already priced into expectations. Instead, investors will be looking closely at the accompanying statement and the Bank’s outlook for future interest rates. Any indication that further increases could follow may strengthen the Pound, while a more cautious message could see Sterling lose ground against both the Euro and US Dollar.
Across the Atlantic, today’s US ISM Services PMI is expected to remain relatively steady at 54.8, suggesting continued growth in the important services sector. However, Friday’s US employment figures are likely to attract greater attention. Non-farm payrolls are forecast to increase by 65,000, compared with just 29,000 previously, while unemployment is expected to remain unchanged at 4.2%. Stronger employment figures could support the Dollar by reducing expectations of interest rate cuts from the Federal Reserve, while weaker figures could provide some relief for GBP/USD.
Elsewhere, Australia’s trade balance figures on Thursday and Canada’s unemployment and Ivey PMI releases on Friday could influence GBP/AUD and GBP/CAD respectively. With several important announcements scheduled over the coming days, particularly Eurozone inflation and the Bank of England decision, we could see increased volatility across the major currency pairs as markets reassess the outlook for interest rates.