Good Morning All;
we’ll see a new currency weekly analysis.
Last Week’s Highlights
Sterling claws back some ground
Euro fluctuates as ECB holds policy
EUR/USD falls to 7M low
This Week’s Highlights
Fed speakers ahead of next week’s meeting
BoE Governor Carney testifies
Q3 UK, US GDP estimates
Sterling recovered some ground last week, gaining around 1.4% against the euro and around 0.58% against the dollar. Sterling-euro rose to a high around 1.1260, its highest levels since the flash crash on 7 October. The pound received some support at the beginning of the week as attention turned to week’s economic releases. CPI inflation rose more than expected in September. Annual CPI rose to 1.0%, with core CPI up to 1.5%. Annual Producer Price Index Output was 1.4% and input 7.2%. Employment data was also largely positive as the Unemployment Rate held at 4.9% for a fourth consecutive month, the lowest level since 2005, and Average Wages rose 2.3% both including and excluding bonuses. Claimant Count Change rose less than expected in September. Retail Sales were flat and weighed slightly on the pound but were largely outweighed by the European Central Bank’s meeting on Thursday. Public Sector Net Borrowing was higher than expected in September at £10.118B, compared to £10.327B in August. MPC Member Haldane defended the BoE’s bond-buying scheme as having supported spending post Referendum.
Key items for the pound this week include testimony from Bank of England Governor Carney on Tuesday and the estimate of Q3 GDP, out Thursday. BoE Governor Carney will be testifying before the Economic Affairs Committee on the economic consequences of the UK’s Brexit vote, which could prompt volatility in the pound. Quarterly GDP growth is expected to slow to 0.3% from 0.7%, while annualised GDP growth may be unchanged at 2.1%. Other releases to keep an eye on include Gfk Consumer Confidence, which returned to pre-Referendum levels in September.
The highlight for the euro last week was Thursday’s European Central Bank meeting. The ECB voted to keep interest rates and QE unchanged. The main refinancing rate remains unchanged at 0.0% and the deposit rate at -0.4%. Monthly QE purchases of €80B are set to continue through to until at least March of next year. The euro initially strengthened 0.7% against the pound and 0.5% against the dollar before reversing those gains. ECB President Draghi said during the subsequent press conference that the ECB “didn’t discuss tapering or the intended horizon” of QE. Interest rates are likely to remain at current or lower levels past the horizon of QE, and the asset purchase programme would likely be wound down rather than being brought to an “abrupt” end. The week’s economic releases indicated that CPI inflation rose to 0.4% in the Eurozone, with Core CPI unchanged at 0.8%. Inflation remains well below the ECB’s target rate of 2%.
This week’s releases include Manufacturing and Services PMI figures from Germany and France as well as the Eurozone as a whole, as well as German PPI, CPI, and Business Climate figures. ECB President Draghi speaks at the German Institute for Economic Research on Tuesday; markets will watch for any additional guidance, which could prompt some volatility in the euro. The euro may remain relatively under pressure as markets continue to digest last week’s ECB meeting and Draghi’s cautious stance, but could take back some ground if the week’s economic releases come in positively.
The dollar strengthened against the euro last week, receiving support from expectations that the Fed will raise interest rates by the end of the year, likely in December. Fed Member Dudley said Wednesday that he would expect to see a rate hike by the end of the year. EUR/USD fell to a seven-month low, breaking below 1.0900, on Friday, in part due to euro weakness following the ECB meeting. Housing data were mixed, with Building Permits and Existing Home Sales rising more than expected while Housing Starts slowed to 1.05M from 1.15M. CPI inflation rose to 1.5% from 1.1%, with core CPI slower at 2.2% compared to 2.3% in August. On a monthly basis, CPI inflation rose to 0.3% and core inflation slowed to 0.1%. Initial Claims rose to 260K from 247K the previous week, a slight upwards revision from the initial estimate of 246K.
Attention will largely be on the Fed on Monday, with scheduled speakers including Dudley, Bullard, Evans, and Powell. The Fed will then observe a week’s quiet period ahead of its meeting next week, at which it is widely expected to hold interest rates while leaving the door open for a hike in December. The key release this week is Friday’s estimate of Q3 GDP. Markets are expecting GDP growth to pick up from 1.4% in Q2 to 2.7% in Q3, which could offer the dollar some support as the week draws to a close. Other releases to keep an eye on include Markit Services and Manufacturing PMIs, Durable Goods Orders, Initial Jobless Claims, and Personal Consumption Expenditures. The dollar may remain relatively strong as markets continue to anticipate a Fed rate hike by the end of the year.