A busy week for sterling, update from Charles Purdy, director of Smart Currency Exchange
A busy week for sterling
Sterling ended the week in positive fashion against the euro, pushing the UK currency to a 1-month high against the single currency following disappointing core inflation results from the Eurozone. In contrast to this, sterling ended the day in much the same position as it started the day against the US dollar, weakening sharply in the morning before recovering these losses throughout the afternoon.
Following a quiet week, this week’s outlook looks more exciting for sterling, with a range of purchasing managers’ index (PMI) data supported by the latest rate setting meeting from the Bank of England (BoE). Monday sees the release of PMI data from the manufacturing industry, which has been steadily falling throughout the second half of the year so will be watched closely by investors. This release is followed by the PMI data from the construction sector on Tuesday and then the services sector on Wednesday. The services sector release is likely to have the biggest impact on the market as it makes up more than two thirds of the UK’s output.
Thursday will see the BoE announce its latest decision on the UK’s interest rates. Although this has the capacity to create significant movement in the markets, it is highly that unlikely we will see a change in policy this week, and thus we expect to see a muted reaction in the markets following the release. Thursday will also reveal Manufacturing and industrial production figures.
Pressure on the European Central Bank
The euro struggled on Friday, despite monthly inflation figures showing a marginal increase from last month. The slight up-tick in inflation did little to dampen investors’ views on the euro. With data released on Friday showing unemployment in the Eurozone remains at 11.5%, close to record highs, expectations mount that the ECB will be forced to further ease monetary policy in the near future to prop up the Eurozone’s economy. Euro weakness combined with US dollar strength caused the euro to weaken to fresh two-year lows this morning.
Looking forward to this week, we have a raft of PMI (Purchasing Managers’ Index) figures for the manufacturing and services industries across the bloc over today and tomorrow. The figures are from a monthly survey of business managers, regarding their general sentiment towards industry conditions, and are a good indication of how the relative economies are performing.
The key release this week will be the ECB (European Central Bank) monthly monetary policy meeting. Market commentators suggest that monetary policy will be kept on hold this week, although pressure continues to mount on the ECB to take further action to help the Eurozone’s economy. If we see no change in policy, the focus will be on the following press conference as investors look for hints as to when the ECB could take further action.
US dollar continues to soar following strong US data
The US dollar strengthened to a two-year high against the euro, near one-year highs against sterling and soared to four-year highs against other major currency pairs. This was driven in large by decisions by the central banks last week in the US and Japan. With the US Federal Reserve ending its quantitative easing cycle and the Bank of Japan voting to increase its monetary stimulus in an attempt to revive its economy, the divergence in monetary policy caused mass selling of the Japanese yen and mass buying of the US dollar.
The US dollar also benefitted significantly form positive data with Chicago PMI and consumer sentiment figures helping to support the US dollar.
There is a raft of data out of the US this week which could impact the US dollars movements.Key to the currency’s performance will be the non-farm pay rolls figure this Friday, which is forecast to rise to 233,000 – in comparison to 250,000 in September. Before then we will have manufacturing and services PMI data, more labour data and several members of the Federal Open Market Committee (FOMC) will also be speaking.
Japanese yen weakens as central bank eases monetary policy
The Japanese yen fell to its weakest level in almost seven years versus the US dollar following an unexpected move by the Bank of Japan to increase its monetary stimulus to combat lower than desired inflation.
Overnight we have seen Chinese PMI data fall unexpectedly to 50.8 from 51.1 causing commodity backed currencies to come under pressure.
The economic calendar is very busy for the rest of the week. The Reserve Bank of Australia meets this week but no policy change is anticipated and we will also have key labour data released from both New Zealand and Australia.
The Governor of the Bank of Canada will be speaking twice this week and we will also see a raft of data released including trade balance figures, labour data and PMI figures.
