Sterling continues to fall- how long will it last?
Sterling continued to fall on Friday, weakening for a fourth straight week against the US dollar thanks to an unexpected increase in US retail sales data which helped strengthen the US dollar to a fresh 14 month high against sterling. Data released on Friday showing a return to growth in both the French and German economies also resulted in sterling hitting a one month low against the single currency.
After a terrible week for sterling, there are a few key releases this week which could help reverse the current trend, or indeed cause further losses for sterling. Following the Bank of England (BoE)’s decision to lower their inflation estimates and growth forecasts last week, the BoE is set to take centre stage once against when it holds its monthly rate setting meeting on Wednesday. Following last week’s announcements, we expect interest rates to be kept on hold at 0.5% for the foreseeable future and so we would expect to see a muted response from the market. On Tuesday we will see confirmation of the latest UK inflation figure, which is expected to have remained steady at 1.2%, still far below the central banks 2% target. Otherwise, Thursday’s retail sales will be the only other major release from the UK, and investors will be hoping for a similarly positive figure to that release from the US last week.
Euro strengthens against the US dollar and sterling
The euro strengthened against both the U.S dollar and sterling following positive euro zone third quarter growth data. The euro rose thanks to data confirming that both the German and French economies grew last quarter, with the French economy growing 0.3%, exceeding the 0.1% expectation. However, the general perception is that serious growth will escape the euro zone in the near future which risks reinforcing the euro’s more recent downturn against the dollar. The impact of the positive growth rates in the euro zone also helped the euro advance euro against sterling, consistently made gains throughout Friday.
Events for the euro this week start today, with a speech from ECB President Mario Draghi. As ever his words are sure to be closely scrutinised by investors, as they look for clues as to his plans specifically regarding quantitative easing. Tomorrow holds some data from Germany, as an independent source releases its economic sentiment figure. The manufacturing sector contributes on Thursday, with the Purchasing Managers Index due from France and Germany as well as the Eurozone as a whole. Friday then rounds off the week with a further speech from Draghi, with any further progress still liable to affect the euro’s performance.
US dollar ends week on a low- FOMC this week’s focus
The US dollar ended last week with varied results throughout the day, despite some positive data. The retail sales figure was the key release on Friday, and by significantly by beating expectations, helps the US dollar to make gains against the vast majority of its partners. This was supported by better than expected import prices to help drive the currency, although this positivity did not last – by the end of the day the currency had given up most of this ground, despite the consumer sentiment figure also beating expectations. Further late weakness saw the dollar finish low against most, including reaching the lowest level in a week against the euro, but held on to smaller gains against a weak sterling.
This week begins with some smaller releases with the Empire State Manufacturing Index and the industrial production figures released on Monday. The Producer Price Index released on Tuesday will bring the first significant release from the US and on the same day we will also hear from a member of the federal reserve. Building permits will be released on Wednesday ahead of the crucial minutes from the most recent FOMC meeting. With interest rate rises still causing varied speculation, any clearer indication as to when we could see a raise in interest rates will cause a significant reaction in the market. A busy Thursday will see more inflation data released in the form of the consumer price index, the weekly unemployment claims figure and the manufacturing sector also contributes with the index from the Philadelphia Fed.
The Canadian dollar continues to gain as Japanese yen remains under pressure
Last week the Canadian dollar gained on the majority of other currencies, including reaching three month highs against sterling after falling below the 1.77 mark. Canadian manufacturing sales figures were better than expected, rising a further 2.1% in September following the good news of a back-to-back gain in the monthly jobs report. However, weak oil prices continue to be a hindrance for the Canadian dollar, given its position as a commodity-driven currency. This week, we expect eyes to be on the CPI data released on Friday – previously, this was 0.2%.
The Japanese Yen remains under pressure and still hovers around the sever year low mark, due to increased sales tax in Q3 of this year, causing the economy to contract a huge 7.1% in the second quarter. If growth continues to be weak this week, it would make Japan likely to call early elections in order to prevent a tax hike next year. The focus will remain in Japan this week after growth data released on Sunday came in a long way below expectations. Later on this week we will have the Monetary Policy Statement and press conference from the Bank of Japan.