Currency market update from director of Smart Currency Exchange, Charles Purdy
Key UK inflation data out on Tuesday
A positive end to the week saw sterling recover a little bit of ground against the US dollar as manufacturing production figures for November and the latest UK trade balance came out better than expected. This was the first time sterling had made a gain against the US dollar in over a week. Sterling was also able to continue its recovery against the euro throughout Friday, finishing the week in a marginally improved position.
A quiet week lies ahead on the UK data release front, with tomorrow’s inflation data providing the only key point of interest from the UK this week. After rising unexpectedly in October, UK inflation continued to slide throughout November, and we are expecting to see another drop in price growth to 0.7% for December. With the staggering fall in oil prices no doubt affecting this, it will be interesting to see what core inflation, which discounts volatile data such as energy prices, comes out as. It will also be interesting to see what effect the release has on sterling and the markets perception of when interest rates will rise. So we could see some significant movement for sterling in the first half of this week as the markets forecast and then react to the release, the difficulty is knowing which way the exchange rate will move.
Elsewhere, we will see the release of numerous economic indicators from the US later in the week, which could see sterling subjected to further downward pressure. We also have the European Central Bank meeting announcement on Thursday. So we should expect news from elsewhere to impact on sterling in the second half of the week.
Will the ECB boost the Eurozone economy this week?
Fortunes were mixed for the euro at the end of last week, seeing no single, direct shift in the currency from factors within the Eurozone. The only data it had to go on was industrial production, which showed an unexpected decline in both France and Germany. With this, the euro fell against sterling, but rose over the day against a weaker US dollar. However, the continued negativity meant that the multi-nation currency was still set for a weekly decline for the fourth week in a row, the longest run since September of last year.
This week has a few releases of note that could impact on the currency’s performance, starting with a monthly economic report from Germany. Tomorrow sees the more significant data start with the German ZEW Economic statement, as the euro looks to its largest contributor for support.
Mid-week is somewhat quieter with just the Spanish unemployment rate due, ahead of a much busier Thursday. This is set to be the most significant day, as the European Central Bank (ECB) will release their monthly interest rate decision. While this is unlikely to show much change in itself, the accompanying press conference is always closely scrutinised for any clues as to its outlook for the area. This is particularly relevant thanks to the speculation over quantitative easing and the political uncertainty in Greece. Has Germany finally acquiesced and agreed that the ECB should re-energise the Eurozone economy through a programme of extra funding? If they have this will bring further pressure on the euro.
Friday then rounds off the week with a number of Purchasing Managers’ Index (PMI) figures, with both manufacturing and services due from France and Germany, as well as the figures for the Eurozone as a whole.
US Dollar – can it keep strengthening?
The US dollar had a disappointing end to the week, after disappointing data surrounding wage growth stateside. The average earnings figures showed an unexpected drop, and as a result detracted from speculation that the Federal Reserve will raise interest rates sooner than later. A positive non-farm employment change figure failed to counteract this negativity, and as such we saw the dollar decline against most, including sterling and the euro.
This week starts off slowly for the US dollar on the data front, with only words from a member of the Federal Reserve liable to impact the markets today. Tomorrow returns to the labour market for job openings data, before the more influential data starts mid-week.
Wednesday holds the retail sales figures from the US, as markets look for more evidence of a strong economy, before a busy Thursday. Here we will see some inflation information in the form of the Producers’ Price Index (PPI), which is due alongside the regular unemployment claims figure. Both of these are key areas for the Federal Reserve to consider for their interest rate rise timeline, and as such are sure to be closely watched. Thursday also brings the manufacturing index from the Philadelphia Federal Reserve, before Friday keeps the tempo with some more inflation figures. This will come in the shape of the Consumer Price index (CPI), before the busy week finishes off with consumer sentiment data from the University of Michigan.
Will Australian jobs data undermine the Australian dollar?
The Australian dollar reversed its recent trend and gained against the majority of other currencies on Friday despite weaker-than-expected retail sales. The figure came out on Friday at 0.1% in comparison to last month’s figure of 0.4%. The other minor data from Australia was around the AI Group construction index, which fell 1 point to 44.4.
This week we have important unemployment figures from the Australia – the labour market is forecast to create 3,800 jobs in comparison to last month’s figure of 42,700 jobs. Any improved figure could continue to be a positive sign for the Aussie dollar.
The Swiss franc remains under pressure (particularly against the US dollar), remaining at its lowest point since May 2012. For the week ahead, Switzerland will release fresh retail sales data, out on Friday. This is likely to be the main event this week.