Currency market update from Charles Purdy, director of Smart Currency Exchange
Key data releases this week – how will sterling perform?
A lack of data last week led to a quiet week for sterling which held its own against the US dollar, lost a little bit of ground against the euro, although still close to seven year highs, and gain ground against the commodity backed currencies.
This week the flow of UK economic data is much busier. Purchasing manager indices from the manufacturing, construction and services industries will be released in the first half of the week, promising to provide insight into the state of the UK economy at the start of the new year. Two of the three are expected to show a slight improvement over the previous month’s figures. With the services industry contributing approximately 70% of the value to the British economy, this figure will be looked at particularly closely on Wednesday. Aside from this, the latest decision on interest rates from the Bank of England (BoE) to be announced on Thursday is likely to pass with limited effect on currency movements as the BoE is expected to leave interest rates on hold at 0.5%.
But key drivers for sterling may be the unfolding of event elsewhere. Discussions within the Eurozone about Greece are in full flow and this may become more fraught as the month progresses. And in the US this week we have the release of key unemployment data.
Greek brinkmanship – how will the euro react?
There was little movement for the euro on Friday as markets remained quiet throughout the week. Poor inflation figures from Europe had little impact, coming out at -0.6% in January. Unemployment for the Eurozone improved slightly, falling to 11.4% in December but remaining high in comparison to that of the UK and the USA. Inflation data was largely ignored as there is purported to be an improved long term outlook due to the European Central Bank (ECB)’s recent decision to roll out quantitative easing, which is due to begin in March.
There is a raft of data to be released for the Eurozone this week. The January purchasing managers indices will be released for manufacturing and for services on Monday and Wednesday respectively. The expectation is for them to hold steady when compared to the previous month. On Wednesday Decembers retail trade data will be released for the Eurozone. All of these data releases have the ability to move exchange rates but it is more likely that the on-going discussions about Greek debt will influence the euro as the tension and brinkmanship builds.
Strong US Dollar hurting exports
The US dollar saw mostly positive outcomes at the end of last week, despite its main data piece coming in behind expectations. The dollar continued to ride on the week’s positivity, gained from its overall place at the top of the list of developed countries likely to increase interest rates. Friday’s main release from stateside was the advance growth figure, an indication of overall growth. This fell by more than anticipated, denting some of investors’ hopes of an early rise in interest rates. Also the rhetoric has increased from key US exporters such as Caterpillar and Du Pont not to increase interest rates as the strong dollar is hurting the competiveness of US exports.
This week sees activity from the get-go, with the Manufacturing Purchasing Managers’ Index (PMI) from the Institute for Supply Management. A quieter day tomorrow sees just the factory orders figure, before Wednesday sees the start of month labour data begin. The first of these will be the independent non-farm employment change, ever an important precursor to the official version. This is joined mid-week by the non-manufacturing PMI, before Thursday’s releases of both the trade balance figures and the unemployment claims.
The week then finishes off with arguably the most important pieces of data, with both the official non-farm figure alongside the overall unemployment rate. The former often provides movement in the market, with the latter an influential figure in the longer term prospects of the currency. As such, both figures will be important indicators of economic health in the short and long terms, and will thus be watched closely.
Busy week for data releases from around the world
This week is a busy week for data releases throughout the world especially from China. Purchasing Manager Indices for manufacturing are due today and for services on Wednesday. Both will be closely watched as there are concerns over the state of growth in the world’s second largest economy.