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The Pound finished last week having managed to make an impressive gain against the Euro in the foreign exchange market; but having fallen heavily against the US Dollar. The GBP/EUR exchange rate which opened the week at levels of 1.1413, stayed fairly range-bound until Thursday’s Bank of England and European Central Bank (ECB) meetings. Following an extremely dovish outlook from the ECB, the Pound took full advantage of Euro-weakness and the exchange rate moved up rapidly, closing on Friday at 1.1617. Aside from the Bank of England’s expected decision to keep rates and asset purchases on hold; the overall picture from the week’s UK economic data was negative though. PMI services data showed a downturn in August, from 55.4 to 51.1; Industrial and Manufacturing production both dropped annually, and producer price index figures showed no change annually, but a drop monthly from 0.3% to 0.1%.
The week ahead does contain a few pieces of high-level market data from the UK. Tuesday will see the release of CPI (inflation) figures, with the market forecast for price-growth to have increased, both annually and month-on-month; which could potentially put the Bank of England in a difficult position in terms of interest rate policy. Sustained levels of inflation would put pressure on the central bank to raise rates; but with the economy still in a fragile state, and the central bank’s continued view that the current levels are temporary, it will be interesting to see how the market reacts. Wednesday will put the UK’s labour market under close scrutiny, with the release of jobless claims change for August, along with the latest claimant count rate figures, and the latest snapshot of the headline UK unemployment rate. Thursday see’s retail sales figures cross the wires, with the week closing out with Friday’s earl morning consumer confidence figures. The Pound does have the potential to continue its drive against the Euro this week; but is more likely to be stoked by increased turmoil and worsening sentiment in the Euro-zone as opposed to large amounts of positive data from the UK.
The Euro took a hammering in the currency exchange market last week, losing huge ground against both the Pound and the US Dollar. There were a number of negative data releases from Europe, namely a downward revision in Euro-zone 2nd quarter GDP from 1.7% to 1.6%, and hugely disappointing factory orders data from Germany. Figures from Germany also showed a drop in the nation’s trade surplus; indicating a slow-down in export activity; which could be attributed to an overly-strong currency, a possible damaging effect of overly-strong policy and rate-hikes from the ECB over the previous months. The biggest risk event though for the Euro was the ECB’s interest rate meeting on Thursday, at which the ECB President Jean-Claude Trichet took a hugely dovish stance; highlighting the downside risks to economic growth, with a shift in over-night index swaps indicating the market now expects the central bank to make rate-cuts by the end of the year. The currency suffered instantly, the EUR/USD exchange rate moving from the week’s open at 1.4141 down to 1.3649 y Friday’s close; following the rate meeting.
This week will see hardly any data from Europe cross the wires; but there is still potential for the data to affect the market heavily. Euro-zone industrial production figures will be released on Wednesday, with any further drop in levels set to increase the pressure on the currency. Thursday will be a major day in terms of risk; with the release of Euro-zone CPI (inflation) figures for August, and also the ECB will publish its latest monthly report. Any rise in price-growth will put pressure on the ECB; which is in no position to make further rate–hikes to control inflation. The ECB’s monthly report is likely to give more insight into policy-makers views on current economic conditions, and the outlook for next few months. The Euro is facing headwinds already this morning with news crossing the wires that Germany’s Chancellor Angela Merkel is set to pass comment on the current Greek debt situation; and the media expectation being that the nation (Germany) is growing increasingly tired of bailing-out weaker nations, and that Germany may be set to ‘wash it’s hand’ of any involvement; which would be disastrous for the Euro-zone.
The US Dollar continued to benefit heavily from turmoil in Europe last week, gaining across the board; its status as a safe-haven currency helping to push the GBP/USD exchange rate back down from the week’s open at 1.6142 to 1.5857 by Friday afternoon. Risk sentiment was the main driver for the Dollar; with minimal economic data crossing the wires from the US during the week. ISM non-manufacturing figures for August showed a slight increase in activity from 52.7 to 53.3, and US trade balance figures showing a decrease in the nation’s trade-deficit. The release of the Federal Reserve’s beige book economic survey showed little in terms of positive news, with most of the Fed’s twelve districts reporting distinctly average conditions for retail sales and housing, with some districts showing contractions in activity.
The US economic docket will see some significant data released this week. Tuesday will see the US’s monthly budget statement cross the wires, followed by the market-moving advance retail sales figures on Wednesday, along with business inventories and producer price figures. Thursday will focus on price-growth, with the release of the latest CPI (inflation) figures, as well as industrial production, and the latest Philadelphia Fed Index. The week will round off on Friday with the University of Michigan confidence survey; with the overall market view for the Dollar to maintain it’s gains amongst what will be a turbulent week for Europe.
This Daily Market Update is brought to you by The Market Team @ KBRFX – Exchange Rates & Foreign Currency Transfer specialists.
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