Sterling shines brightly to begin the week
Last week was an impressive performance by sterling. PMI figures set up a winning week for the pound, and that was definitely evident against the euro and even the US dollar. Although Europe had a pretty rough end to the week, sterling managed to hold on to gains at least to start this week in control. With much quieter days ahead, the main releases this week are claimant count and the unemployment rate all due on Wednesday. Employment figures will be important considering forward guidance by the BoE. A disappointing industrial production figure gave Governor Carney some breathing room, however good employment figures will put the pressure back on the central bank governor. Better employment data will suggest the UK will reach a 7% unemployment rate quicker than the BoE predicts, fuelling speculation of an earlier than expected interest rate increase. The Inflation Report hearings on Thursday will gain plenty of attention considering Carney has made limited reference to inflation of late. Continued sterling momentum is possible mid-week if employment data provides upside surprise. However, with resistance at the €1.19 level sideways movement is likely to continue for the majority of this week with sterling gaining as we approach week end.
Big week for the US before taper decision
Friday ended badly for the dollar as non-farm employment data disappointed, while the July readings were revised downwards. Unemployment fell to 7.3% but this was a result of lower labour participation rather than an increase in people finding work. This fuelled more confusion in the market as to whether the US economy is in a good enough state to warrant a reduction in stimulus. This week will be a good occasion for US data to impress, ahead of the Fed meeting next week. Unemployment claims, retail sales and Preliminary UoM Consumer Sentiment are all due towards the end of the week and present the opportunity for the dollar to strengthen ahead of the monetary policy meeting. If data releases are as expected, GBPUSD levels of 1.56 could soon be a distant memory and levels of 1.54 will be more familiar.
Time is running out for the dollar if tapering is to begin in September. Depending on the outcome of US releases, we could see a big shift in dollar momentum at the end of the week. Overall the US recovery still seems strong and therefore we expect the dollar to encounter some sideways movement during the week, gaining a little momentum against both sterling and the euro as the week unfolds.
Cracks in German data begin to show
After signs of some resilience in August, the euro seems to have backtracked in the face of last week’s surge by the pound, resulting in the higher GBPEUR rate. Disappointing retail sales and Italian PMI data contributed to euro weakness. Poor German Factory Orders and industrial production data certainly fuelled the fire, coming in at -2.7% and -1.7% respectively. It seems even German data is beginning to falter, which does the euro no favours. This week is quiet in Europe on the data front although industrial production figures are due on Thursday. Thursday also sees the ECB monthly bulletin and ECB President Draghi’s speech, which will interest the market. It is unlikely the euro will be able to rebound against the dollar but we expect mostly sideways trading against sterling this week.
End of week forecast
GBP / EUR
|
1.19
|
GBP / USD
|
1.5625
|
EUR / USD
|
1.31
|
GBP / AUD
|
1.71
|
Sasha Nugent
Currency Analyst
