11th September 2017 Market Update
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?? GBP – The UK started last week with construction and retail figures published below expectations and showed a growth slowdown compared to July. Market impact was minimal but the construction figures will be concerning as it nears the point of industry contraction, having been resilient since the EU Referendum. Sterling gained in the absence of mid-week data, particularly against the US dollar, which moved to monthly highs and back above key resistance levels.
Volatility could arise from the vote on the EU Withdrawal Bill tonight. Average earnings data on Wednesday will be viewed in the context of inflation data on Tuesday. An increase in inflation is expected to boost the pound but analysts will be looking for average earnings to also improve to maintain momentum. The Bank of England’s Monetary Policy Committee is back up to full strength for Thursday’s interest rate decision and accompanying statement, which will be pored over for forward guidance.
?? EUR – A mixed bag of Eurozone services and retail sales data was a side show to the much anticipated ECB Monetary Policy Statement and Press Conference last Thursday. Analysts had anticipated that President of the ECB, Draghi, would give a definitive timeframe for the tapering of its QE programme. Assurance was provided that the matter would be addressed in October, boosting the euro by 0.75% as the ‘soft intervention’ by Draghi and a lack of panic regarding the overvaluation of the Euro exuded confidence. The euro lost ground as markets calmed shortly afterwards but the single currency looks likely to remain on the front foot in the coming months.
The Eurozone has a lack of data this week which may mean that last week’s losses against the pound and gains against the US dollar will persist. German inflation readings early on Tuesday morning may help the euro but Industrial Production figures on Wednesday will most likely be overlooked.
?? USD – TThe US dollar index, a measure of the Greenback against a basket of currencies fell to a 33 month low last week due to concerns of hurricane damage and political instability. Investors left the US dollar in droves, heading towards the traditional safe havens of the Japanese Yen and Gold. Fed policymakers exacerbated the situation as vice-chairman and traditionally hawkish member, Stanley Fischer, resigned before the end of his term. Lael Brainard highlighted the GDP impact of this year’s hurricane season and how inflation remains subdued. Dudley also referred to the structural reasoning for lagging inflation despite calling for an interest rate hike. Overall, investors have become doubtful that a third rate rise will occur before the end of the year.
Data from the US is clustered towards the latter part of the week, beginning with inflation readings on Thursday. An improvement could assist the US dollar ahead of Retail Sales readings which are expected to disappoint on Friday. The economic impact of hurricanes Harvey and Irma are likely to weigh heavily on the US dollar throughout the week.
09:30am – Inflation (CPI) – previously 2.6%, expected 2.8%
12:00pm – Bank of England Interest Rate Decision
13:30pm – Inflation (CPI) – previously 1.7%, expected 1.8%
13:30pm – Retails Sales – previously 0.6%, expected 0.1%
Our View: Sterling enjoyed a strong streak last week and will be hoping to hold on to the gains given the US dollar’s recent struggles. However, the euro shows little sign of giving up its recent dominance in the coming months, particularly with the strongest confirmation yet of the tapering of QE. The pound is likely to remain sensitive and volatile in the face of interest rate increase chances diminishing and the ongoing Brexit negotiations.
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