Sterling up again, investors await ECB stimulus decision
08/Mar/2016 • Currency Updates•
Financial markets worldwide are now focusing heavily on upcoming central bank announcements this month in the US and, more imminently, the Eurozone. This Thursday’s European Central Bank meeting, in particular, could prove crucial for businesses with exposure to the Euro as large movements in the single currency are expected.
Thursday could provide the first buying opportunities for GBP/EUR back over the 1.30 handle, going against the general medium-term trend of Brexit-induced Sterling depreciation. This has created a divergence between where economic fundamentals position Sterling and where the Pound actually is. We see businesses review their liabilities to be paid in Euros against GBP this week because of the ECB meeting.
The Euro dipped against the Pound as markets opened for the week on Monday, with investors increasing bets that the ECB will ramp up its monetary stimulus on Thursday to support the fragile Eurozone economy. We continue to expect another cut in the central bank’s deposit rate as well as an increase in the quantitative easing programme which launched in the Euro-area 12 months ago.
Meanwhile, Sterling’s rally continued, with the currency appreciating across the board. The Pound appears to be recovering well following its recent depreciation that we believe to have been excessive.
The UK currency was helped by unusually poor labour data in the US yesterday, in contrast to last Friday’s solid nonfarm payrolls figure that suggested the US labour market was weathering headwinds from a global economic slowdown.
In the commodity market, the price of Brent crude oil broke back over the $40 a barrel mark for the first time since mid-December. This proved good news for oil-dependent currencies, with the Russian Ruble touching its strongest position so far in 2016. On the whole, emerging market currencies traded within a narrow band as investors awaited more meaningful announcements in the coming days.
Major currencies in detail:
Weak labour data in the US sent the Pound 0.75% higher against the US Dollar on Monday.
No economic announcements whatsoever in the UK yesterday meant that Sterling was largely driven by events elsewhere. With Brexit concerns seeming to take a back seat in the past few trading days, strong economic data in the coming weeks could open the door to an improved Sterling performance in the run-up to the referendum.
Former Bank of England Governor Mervyn King tentatively added his name to the growing list of high profile figures voting to leave the EU by suggesting he could vote for a Brexit come referendum time in June.
A speech from Bank of England Governor Mark Carney this morning will be the only announcement of note in the UK, with no economic data scheduled.
The Euro strengthened by 0.5% against the US Dollar on Monday, despite growing expectations for further easing by the ECB.
Announcements in the Eurozone were light on Monday. The monthly measure of investor confidence from Sentix underwhelmed expectations. The index dipped to 5.5 from 6, its third decline in the past three months and lowest level in more than a year as investors’ concerns regarding the state of the global economy heightened.
However, all eyes are now firmly on the ECB with the latest Reuters poll, released yesterday, now pointing heavily to the announcement of aggressive monetary easing from President Draghi. All 19 traders polled expected a cut in the deposit rate, while 68% now expect policymakers to announce an expansion in monthly QE purchases.
Economic growth figures for the fourth quarter are expected to remain unrevised when released this morning. The Euro will continue to be driven by expectations for Thursday’s ECB meeting.
The US Dollar dipped against its major peers yesterday, falling by 0.4%.
The Dollar’s rally was stalled by poor labour data, which came as a surprise following last Friday’s solid nonfarm payrolls report. The Federal Reserve’s labour market conditions index turned negative in February for the first time since April last year, declining to -2.4 from 0.4 . The index, which takes into account 19 different indicators in the US, has now declined for the past two months.
Overall, however, we believe the US labour market is performing strongly, and continue to expect the Fed to hike interest rates roughly once a quarter this year.
This week looks set to be relatively light in terms of economic data in the US, meaning Thursday’s ECB announcement will take centre stage. The next main event in the US will be next week’s Federal Reserve meeting.
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