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Sterling suffers a week of heavy losses

9th October 2017 Market Update

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🇬🇧 GBP – The pound endured its worst five days in almost a year last week, as market uncertainty returned with a vengeance. This was primarily due to the perceived disaster of a speech by Theresa May, which was supposed to appease the doubters and provide assurance that the UK is heading in the right direction. Unfortunately, it appears to have provoked more uncertainty with regard to how much positive progress can be made with the Brexit negotiations when the government is perceived to be in disarray. It is a stark reminder of just how vulnerable Sterling is to any Brexit negativity and will remain so.

That said, there is a feeling that investors over-reacted to the recent bullish tones from the Bank of England concerning interest rates and that the currency just needed an excuse to retreat to more comfortable levels. Even a small interest rate rise in November may not rally the pound that much.

This week sees very little data from the UK to change current levels, though some positive Manufacturing Production data on Tuesday wouldn’t go amiss. The forecast is for a slightly weaker reading from the previous 0.5%, at 0.3%.

🇪🇺 EUR – The euro has been quietly minding its own business of late though, along with Sterling, the currency has retreated versus the rallying US dollar. There seems very little that can dent the single currency in the short term and imminent monetary policy changes from the ECB, especially concerning the tapering of stimulus measures, should only serve to strengthen the euro further.

On that note, Mario Draghi speaks on Thursday afternoon. Up to now, the ECB Chairman has been reluctant to commit to any immediate changes and has shied away from commenting on his perceptions of a relentlessly strong euro. It will be interesting to hear if his tone has changed and if he will deliver any specifics.

🇺🇸 USD – The dollar was the big winner last week, making major gains throughout. This was on the back of a stream of positive data, including Employment Change, Service Sector and Non-Farm Payrolls.

The greenback has another busy week ahead. Today sees the country enjoying a public holiday, but tomorrow introduces the first speech of the week by an FOMC member. There are a further two on Friday and investors will, as ever, be listening for anything out of the ordinary.

Wednesday evening sees the monthly publication of the FOMC minutes from the last policy meeting, while Thursday heralds monthly PPI data, together with the weekly Unemployment Claims reading. Friday is especially full, with CPI figures, Core and non-Core Retail Sales data. Positive outputs could well strengthen the dollar further.

 

Key Announcements

Nothing of note today.

 

Our View: It is difficult to see where Sterling goes from here. The Brexit negotiations are stifling any meaningful recovery from post-vote levels and it is becoming increasingly apparent that positive economic data is being largely ignored. It is difficult to see beyond this for the immediate future, though the Bank of England could potentially assist with some real positive commitment to a timetable of interest rate increases. This is unlikely however and without it, the grim reality is that the pound will merely tread water for the foreseeable future.

 

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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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