Businesses should expect increased volatility in currency markets this week
04/Nov/2015 • Currency Updates•
With economic indicator data relatively scarce yesterday, attention among UK and European businesses trading the major currencies now turns to the upcoming significant economic releases. The Bank of England’s “Super Thursday” tomorrow and the US labour report on Friday are likely to cause volatility in the markets.
These two tier-one data releases will give a strong indication as to when the respective central banks will look to increase interest rates. So, will the cost of borrowing increase? – that is the big question for growing businesses.
The US Dollar showed broad strength against almost all of its major counterparts yesterday, appreciating against every G10 currency during the London trading session. The outcome of Friday’s labour report could be crucial for the short-term evolution of the USD. A job creation figure around the 200,000 mark, as we’ve recently been accustomed to, should provide support for an interest rate hike by the Federal Reserve next month.
Meanwhile, the Pound approached its strongest position in 10 weeks against its basket of major counterparts.
Indications last night from Mario Draghi that further quantitative easing is on its way in December continue to put pressure on the Euro. The ECB appears increasingly concerned about growth prospects in the Eurozone and and other downside risks to inflation.
Major currencies in detail:
Sterling edged back towards a 10-week high, in trade weighted terms, yesterday following a 0.5% appreciation against the Euro, despite the currency ending 0.1% lower versus the Greenback.
The Pound was little moved yesterday morning after construction growth data came in right in line with expectations. The construction industry, which accounts for less than 10% of overall UK economic output, grew at a solid pace once again, with the PMI registering 58.8 for October. Despite dipping by 0.1 points from the six-month high recorded a month previous, new work increased at its fastest rate in a year.
Combined with Monday’s impressive manufacturing data, this paints a very encouraging picture of final-quarter UK economic growth, leading into today’s start of the Bank of England’s two-day Monetary Policy Meeting.
The latest measure of service sector growth will be in focus when released at 9:30am this morning. However, almost all attention will be on the build-up to Thursday’s Bank of England releases.
The single currency dipped throughout the day yesterday, ending the London trading session 0.6% down and approaching the three-month low it achieved following last week’s hawkish Federal Reserve monetary policy statement.
This Euro depreciation came amid an increased use of so-called “carry trades”, where an increased appetite for risk among investors causes them to borrow low-yielding currencies, such as the Euro, and sell to buy higher-yielding ones.
Yesterday was also a very quiet day in terms of economic indicator data in the Eurozone, with no major releases of note to digest. Unemployment in Spain edged marginally higher for the third straight month, although the very minor data point did little to move the common currency.
Today bodes to be a much busier day of economic releases in the Eurozone. The services PMI for October and producer prices this morning will both be worth looking out for.
The US Dollar recommenced its upward trend against most of its major currency peers yesterday, erasing most of its losses from last Friday, and approaching its strongest position since mid-August. The US Dollar index increased by 0.4%.
This appreciation came ahead of this Friday’s crucial nonfarm payrolls report which, if there are no negative surprises, could put the Federal Reserve firmly on course for an interest rate hike at next month’s FOMC meeting.
In terms of US economic data yesterday, factory orders were fairly underwhelming, declining by 1% in September, the second straight month of declines. Meanwhile, an economic optimism survey dipped, while the ISM New York manufacturing index increased to its highest level since July.
There’s a whole host of economic data to be released out of the US economy today. Trade balance data, service sector growth and ADP’s measure of employment change for October will be in focus, all of which are capable of causing moderate US Dollar volatility today. Janet Yellen will also be testifying before Congress this afternoon, although may not touch on monetary policy.
Rest of the world
The Australian Dollar steadied yesterday after experiencing strong gains during Asian trading, following the decision of the Reserve Bank of Australia to leave its benchmark interest rate unchanged at 2%.
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